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This report assesses the potential of electricity contract auctions as a procurement option for the World Bank's client countries. It focuses on the role of auctions of electricity contracts designed to expand and retain existing generation capacity. It is not meant to be a 'how-to' manual. Rather, it highlights some major issues and options that need to be taken into account when a country considers moving towards competitive electricity procurement through the introduction of electricity auctions. Auctions have played an important role in the effort to match supply and demand. Ever since the 1990s, the use of long-term contract auctions to procure new generation capacity, notably from private sector suppliers, has garnered increased affection from investors, governments, and multilateral agencies in general, as a means to achieve a competitive and transparent procurement process while providing certainty of supply for the medium to long term. However, the liberalization of electricity markets and the move from single-buyer procurement models increased the nature of the challenge facing system planners in their efforts to ensure an adequate and secure supply of electricity in the future at the best price. While auctions as general propositions are a means to match supply with demand in a cost-effective manner, they can also be and have been used to meet a variety of goals.

This report summarizes the results of a recent review of the emerging experience with the design and implementation of policy instruments to promote the development of renewable energy (RE) in a sample of six representative developing countries and transition economies ('developing countries') (World Bank 2010). The review focused mainly on price- and quantity-setting policies, but it also covered fiscal and financial incentives, as well as relevant market facilitation measures. The lessons learned were taken from the rapidly growing literature and reports that analyze and discuss RE policy instruments in the context of different types of power market structures. The analysis considered all types of grid-connected RE options except large hydropower: wind (on-shore and off-shore), solar (photovoltaic and concentrated solar power), small hydropower (SHP) (with capacities below 30 megawatts), biomass, bioelectricity (cogeneration), landfill gas, and geothermal. The six countries selected for the review included Brazil, India, Indonesia, Nicaragua, Sri Lanka, and Turkey.

The object of this chapter is to propose an environment in which expropriations cannot be ruled out because of ex post political pressures. General conditions are derived that characterize the optimal ex ante contract, in the sense that the government maximizes social welfare under the threat of expropriation. Here, it is also shown how the optimal contract can be implemented using a competitive auction. In the model utilized in this chapter, the government has a natural resource project that requires up-front sunk investment, as in the case of a mining or oil extraction project. Since the problem of expropriation usually arises with foreign investment, profits are not included in the welfare function of the planner, and because the good is not consumed at home but exported, the government only cares about the revenues it can obtain from the project.

An Equivalence Theorem between geometric structures and utility functions allows new methods for understanding preferences. Our classification of valuations into \"Demand Types\" incorporates existing definitions (substitutes, complements, \"strong substitutes,\" etc.) and permits new ones. Our Unimodularity Theorem generalizes previous results about when competitive equilibrium exists for any set of agents whose valuations are all of a \"demand type.\" Contrary to popular belief, equilibrium is guaranteed for more classes of purely-complements than of purely-substitutes, preferences. Our Intersection Count Theorem checks equilibrium existence for combinations of agents with specific valuations by counting the intersection points of geometric objects. Applications include matching and coalition-formation, and the \"Product-Mix Auction\" introduced by the Bank of England in response to the financial crisis.

Auctions are widely used in practice. Although auctions are also extensively studied in the literature, most of the developments rely on the significant common prior assumption. We study the design of optimal prior-independent selling mechanisms: buyers do not have any information about their competitors, and the seller does not know the distribution of values but only knows a general class to which it belongs. Anchored on the canonical model of buyers with independent and identically distributed values, we analyze a competitive ratio objective in which the seller attempts to optimize the worst-case fraction of revenues garnered compared with those of an oracle with knowledge of the distribution. We characterize properties of optimal mechanisms and in turn establish fundamental impossibility results through upper bounds on the maximin ratio. By also deriving lower bounds on the maximin ratio, we are able to crisply characterize the optimal performance for a spectrum of families of distributions. In particular, our results imply that a second price auction is an optimal mechanism when the seller only knows that the distribution of buyers has a monotone nondecreasing hazard rate, and it guarantees at least 71.53% of oracle revenues against any distribution within this class. Furthermore, a second price auction is near optimal when the class of admissible distributions is that of those with nondecreasing virtual value function (a.k.a. regular). Under this class, it guarantees a fraction of 50% of oracle revenues, and no mechanism can guarantee more than 55.6%. This paper was accepted by Kalyan Talluri, revenue management and market analytics .

Display advertising is a major source of revenue for many online publishers and content providers. Historically, display advertising impressions have been sold through prenegotiated contracts, known as reservation contracts , between publishers and advertisers. In recent years, a growing number of impressions are being sold in real-time bidding (RTB), where advertisers bid for impressions in real time, as consumers visit publishers’ websites. RTB allows advertisers to target consumers at an individual level using browser cookie information, and enables them to customize their ads for each individual. The rapid growth of RTB has created new challenges for advertisers and publishers on how much budget and ad inventory to allocate to RTB. In this paper, we use a game theory model with two advertisers and a publisher to study the effects of RTB on advertisers’ and publishers’ strategies and their profits. We show that symmetric advertisers use asymmetric strategies where one advertiser buys all of his impressions in RTB, whereas the other advertiser focuses on reservation contracts. Interestingly, we find that while both advertisers benefit from the existence of RTB, the advertiser that focuses on reservation contracts benefits more than the advertiser that focuses on RTB. We show that while RTB lowers the equilibrium price of impressions in reservation contracts, it increases the publisher’s total revenue. Despite many analysts’ belief that, because of being more efficient, RTB will replace reservation contracts in the future, we show that publishers have to sell a sufficiently large fraction of their impressions in reservation contracts to maximize their revenue. We extend our model to consider premium consumers, publisher’s uncertainty about the number of future visitors, and effectiveness of ad customization. The online appendix is available at https://doi.org/10.1287/mksc.2017.1083 .

In sponsored search advertising, advertisers bid to be displayed in response to a keyword search. The operational activities associated with participating in an auction, i.e., submitting the bid and the ad copy, customizing bids and ad copies based on various factors (such as the geographical region from which the query originated, the time of day and the season, the characteristics of the searcher), and continuously measuring outcomes, involve considerable effort. We call the costs that arise from such activities keyword management costs . To reduce these costs and increase advertisers’ participation in keyword auctions, search engines offer an opt-in tool called broad match with automatic and flexible bidding , wherein the search engine automatically places bids on behalf of the advertisers and takes over the above activities as well. The bids are based on the search engine’s estimates of the advertisers’ valuations and, therefore, may be less accurate than the bids the advertisers would have turned in themselves. Using a game-theoretic model, we examine the strategic role of keyword management costs, and of broad match, in sponsored search advertising. We show that because these costs inhibit participation by advertisers in keyword auctions, the search engine has to reduce the reserve price, which reduces the search engine’s profits. This motivates the search engine to offer broad match as a tool to reduce keyword management costs. If the accuracy of broad match bids is sufficiently high, advertisers adopt broad match and benefit from the cost reduction, whereas if the accuracy is very low, advertisers do not use it. Interestingly, at moderate levels of bid accuracy, advertisers individually find it attractive to reduce costs by using broad match, but competing advertisers also adopt broad match and the increased competition hurts all advertisers’ profits, thus creating a “prisoner’s dilemma.” When advertisers adopt broad match, search engine profits increase. It therefore seems natural to expect that the search engine will be motivated to improve broad match accuracy. Our analysis shows that the search engine will increase broad match accuracy up to the point where advertisers choose broad match, but that increasing the accuracy any further reduces the search engine’s profits.

In markets with budget‐constrained buyers, competitive equilibria need not be efficient in the utilitarian sense or maximize the seller's revenue. We consider a setting with multiple divisible goods. Competitive equilibrium outcomes, and only those, are constrained utilitarian efficient, a notion of utilitarian efficiency that respects buyers' demands and budgets. Our main contribution establishes that when buyers have linear valuations, competitive equilibrium prices are unique and revenue‐optimal for a zero‐cost seller.

This research examines how the intensity of the dynamic competitive interaction with other bidders in ascending auctions influences consumers’ willingness to pay (WTP) for auctioned products. It focuses on one important aspect of this interaction: the speed of competitor reaction. The key hypothesis is that having one’s own bids reciprocated by competing bidders more quickly increases one’s WTP in an auction. Evidence from five experiments demonstrates this effect and pinpoints the essential aspects of the psychological mechanism that underlies it. In particular, the effect of speed of competitor reaction on bidding behavior (1) is serially mediated by the perception that the auction is more intensely competitive and by a greater desire to win, (2) is distinct from the effects of time pressure and of the auction’s duration or overall rate of progression, (3) is not driven by inferences about the auctioned product’s market value, (4) is not qualified by the number of competing bidders nor due to any inferences about the latter, and (5) hinges on direct competitive interaction with other human bidders.

We examine the effect of the presence of expert buyers on other buyers, the platform, and the sellers in online markets. We model buyer expertise as the ability to accurately predict the quality, or condition, of an item, modeled as its common value. We show that nonexperts may bid more aggressively, even above their expected valuation, to compensate for their lack of information. As a consequence, we obtain two interesting implications. First, auctions with a “hard close” may generate higher revenue than those with a “soft close.” Second, contrary to the linkage principle, an auction platform may obtain a higher revenue by hiding the item’s common-value information from the buyers. We also consider markets where both auctions and posted prices are available and show that the presence of experts allows the sellers of high-quality items to signal their quality by choosing to sell via auctions. This paper was accepted by J. Miguel Villas-Boas, marketing .