Organization and Efficiency in Electricity Markets
Erin T. Mansur and Matthew White
Paper to be revised and resubmitted to the
American Economic Review.
Working Paper, January 2012.
Electricity markets exhibit two
forms of organization: decentralized bilateral trading and centralized auction
markets. Using detailed data on prices, quantities, and production costs, we
examine how market outcomes changed when a large region in the Eastern US rapidly switched from a bilateral system of
trade to an auction market design in 2004. Although economic theory yields
ambiguous predictions, the empirical evidence indicates that employing an
organized market design substantially improved overall market efficiency, and
that these efficiency gains far exceeded implementation costs. Our analysis
suggests organized markets achieve these gains because of superior information
aggregation about trading opportunities in markets with congestion