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Sam Dinkin Chief Economist. Energy Auction Alternatives. The kinds problem we are solving. Offshore leases, government sales and foreign concessions The National Petroleum Reserve has a collection of similar oil leases Property acquisition and disposition Power plant sales

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the kinds problem we are solving
The kinds problem we are solving
  • Offshore leases, government sales and foreign concessions
    • The National Petroleum Reserve has a collection of similar oil leases
  • Property acquisition and disposition
    • Power plant sales
  • Power purchasing and sale
    • NJ BGS auction
    • Texas Capacity Auction
  • Simultaneous Ascending Clock Auctions (SACA) auctions improve results by allowing “switching”

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switching illustration

A

C

B

“Switching” Illustration
  • There are two items being auctioned
    • Widget X and Widget Y
  • There is one “strong” bidder, “A”
    • Willing to buy either item for up to $1000
    • Isn’t interested in both – who needs two widgets?
  • There are two “weak” bidders
    • Bidder “B” will pay up to $500 for Widget X or up to $200 for Widget Y
    • Bidder “C” will pay up to $200 for Widget X or up to $500 for Widget Y
  • Values can be shown in a table

Y

X

X

Y

A

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C

B

sequential auctions

A

A

C

C

B

B

Sequential Auctions
  • Suppose Widget X is auctioned first
  • A typical auction might proceed as follows:
  • Having won Widget X, Bidder A doesn’t bid in the auction for Widget Y:
  • The total revenue from this auction is $700
  • The “afternoon effect” is clear: the price dropped dramatically in the later auction

X

Y

Bought for $500

No longer valued

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$300

$500

Sold to Bidder A for $500!

Sold to Bidder C for $200!

$100

$400

Bought for $200

$200

simultaneous auction

A

A

C

C

B

B

Simultaneous Auction
  • A simultaneous auction is superior
  • Bidders, in particular the “strong” bidders, can switch between the two widgets:
  • Because the strong bidder, “A” was able to switch back and forth between the two items
    • The end prices were the same
    • The final revenue was $1000, instead of $700
  • Simultaneous bidding avoids the price drop!

X

Y

Bought for $500

$300 on Y

$200 on X

$400 on X

$100 on Y

$500 on Y

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Bought for $500

$300 on X

$100 on X

$500 on X

X is Sold to B for $500!

Y is Sold to A for $500!

$400 on Y

$200 on Y

the afternoon effect
The “Afternoon Effect”
  • When items are auctioned in sequence, prices tend to drop off in later auctions
    • Known as the “afternoon effect” – as the sun begins to fall, so do prices
  • “Strong” bidders win earlier auctions (certainty) and then go home
    • I.e. those willing to pay the most
  • In the later auctions, only the “weak” bidders are left
    • I.e. those willing to pay the least
  • With weaker bidders, prices are lower
  • Actually happened in US Broadcast Satellite auction
  • It pays for the strong bidder to sometimes bide his time
    • Even when prices are higher in the second auction, the different prices are unfair and lower revenue overall
  • Simultaneous auctions have similar prices for similar lots and have higher revenues than sequential auctions

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emerging answer simultaneous auction
Emerging Answer: Simultaneous Auction
  • ERCOT and PJM, the two most progressive electric grids, have used simultaneous auction for over $10B in electricity sales
    • Sources at New Jersey Board of Public Utilities and electricity distribution companies estimate they would have been $1.3B worse off had they used sealed bids
  • Alberta power generation sales
  • EDF auction
  • Upcoming Northeast Regional Capacity Market
  • FCC used to sell $30B of telecom spectrum in dozens of auctions with geographical synergies

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simultaneous auctions are superior
Simultaneous Auctions Are Superior
  • Iterative nature of multiple rounds means;
    • Bidders don’t have to guess what it takes to win
    • Bidders can improve bids each round
    • Bidder gain valuable information about valuations in the market that reinforce their own valuations
    • Bidders can be assured of not winning more than they want
  • Rules are designed to be efficient
    • The auction is fast: the bid increment is large when there is a lot of competition and small when there is a little competition.
    • Tie-break rules select the most interested bidder at each step in the bidding process
    • The high value bidder always wins paying a lower % of their maximum value increasing auction revenue and bidder profit
  • Fair to all participants
    • Substitution between similar lots provides additional competition from low-quantity bidders
  • Expert auction design provides strong weight in Board Room decisions

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sealed bid vs saca bidder values

A

A

C

B

B

C

Sealed Bid vs. SACA: Bidder Values

X

Y

  • A typical situation in which a SACA generates higher revenues
  • Two leases: X and Y
  • Three bidders:
    • Bidder A values:
      • X for $1700
      • Y for $1700
      • X & Y for $2800
    • Bidder B values:
      • X for $1500
      • Y for $1000
      • X & Y for $2600
    • Bidder C values:
      • X for $1000
      • Y for $1500
      • X & Y for $2400
  • These values are shown in the table to the left:

Y

Y

X

X

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sealed bid vs saca sealed bid outcome

A

B

C

Sealed Bid vs. SACA: Sealed Bid Outcome
  • In a sealed bid auction:
    • Bidder A’s strategy is to bid:
      • $1400 on X
      • $1300 on Y
      • This allows a profit even in the case where both leases are won
    • Bidder B’s strategy is to bid:
      • $1300 on X
      • $900 on Y
    • Bidder C’s strategy is to bid:
      • $800 on X
      • $1200 on Y
  • The result:
    • Total profit: $100

Y

Y

X

X

X & Y

For

$2700

Y

X

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None

None

sealed bid vs saca saca outcome

A

A

B

B

C

C

Sealed Bid vs. SACA: SACA Outcome
  • In an SACA auction, bidders can safely be more aggressive:
    • Bidding starts at $800
    • Ties are broken at random
  • No further bids above $1500
  • Bidders A and C could observe the auction as it progressed
    • Because Bidder A could avoid the undesirable outcome of winning both leases, higher bids became safe
    • Because Bidder C could see that a $1200 bid could not win, a higher bid became strategically necessary
  • Higher efficiency means higher bidder profit

Y

Outcome

Y

X

X

Bought

for $1500

Round 1

Round 11

Round 3

Round 8

Round 4

Round 6

Round 2

Round 10

Round 7

Round 9

Round 5

Round 13

Round 12

$1400

$1200

$1500

$1000

$900

$1300

$800

$800

$900

$1100

$800

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$1500

$1000

$900

$1300

$900

$800

$1100

$1000

$800

$1400

$800

$1200

Bought

for $1500

alkera s auction experience
Alkera’s Auction Experience
  • Experience in complex, multi-billion auctions with impressive results:

New Jersey: Market design and software development for the simultaneous descending clock auction run by electricity distributors

Singapore: Market design and auction software developed for the 3G auction organised by the Infocomm Development Agency

Italy: Market design and auction software developed for the 3G mobile wireless and Broadband spectrum auctions run by the Ministry of Communications.

Guatemala: Market design and auction software developed for the Secretary of International Communications

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Canada: Auction software developed for Industry Spectrum Management Agency

Mexico: Market design and auction software developed for Commicion Federale de Telecommunicaciones

U.S.: Software and hosting for a US water auction in one of the largest metropolitan markets of the United Sates

Texas: Market design and software for a simultaneous ascending clock auction run by power generating companies