We examine the bidding behavior of firms in the Texas electricity spot market, where bidders submit hourly supply schedules to sell power. We characterize an equilibrium model of bidding and use detailed firm-level data on bids and marginal costs to compare actual bidding behavior to theoretical benchmarks. Firms with large stakes in the market performed close to the theoretical benchmark of static profit maximization. However, smaller firms utilized excessively steep bid schedules significantly deviating from this benchmark. Further analysis suggests that payoff scale has an important effect on firms' willingness and ability to participate in complex, strategic market environments. Copyright (c)2008, RAND.

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This paper analyzes the pricing behavior of electricity generating firms in the restructured California market from its inception in April 1998 until its collapse in late 2000. Using detailed firm-level data, I find that conduct is fairly consistent with a Cournot pricing game for much of the sample. In summer and fall 2000, the market was slightly less competitive, yet the dramatic rise in prices was more driven by changes in costs and demand than by changes in firm conduct. The five large nonutility generators raised prices slightly above unilateral market-power levels in 2000, but fell far short of colluding on the joint monopoly price. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.