Market 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.

Abstract:

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 externalities.