Supply Function Equilibria of Pay-as-Bid Auctions

This paper characterizes the Nash equilibrium in a pay-as-bid (discriminatory), divisible-good, procurement auction. Demand by the auctioneer is uncertain as in the supply function equilibrium model. A closed form expression is derived. Existence of an equilibrium is ensured if the hazard rate of the perfectly inelastic demand is monotonically decreasing and sellers have non-decreasing marginal costs. Multiple equilibria can be ruled out for markets, for which the auctioneer’s demand exceeds suppliers’ capacity with a positive probability. The derived equilibrium can be used to model strategic bidding behaviour in pay-as-bid electricity auctions, such as the balancing mechanism of United Kingdom. Offer curves and mark-ups of the derived equilibrium are compared to results for the SFE of a uniform-price auction.