Copyright (c) 2011 All rights reserved. http://works.bepress.com/cramton Recent documents in Peter Cramton en-us Wed, 16 Feb 2011 01:36:35 PST 3600 http://works.bepress.com/cramton/179 http://works.bepress.com/cramton/179 Mon, 14 Feb 2011 11:22:13 PST Spectrum auctions are used by governments to assign and price licenses for wireless communications. Effective auction design recognizes the importance of competition, not only in the auction, but in the downstream market for wireless communications. This paper examines several instruments regulators can use to enhance competition and thereby improve market outcomes. Peter Cramton Auctions Telecommunications Market Design http://works.bepress.com/cramton/178 http://works.bepress.com/cramton/178 Fri, 14 Jan 2011 12:32:09 PST Peter Cramton Healthcare http://works.bepress.com/cramton/177 http://works.bepress.com/cramton/177 Fri, 14 Jan 2011 12:30:46 PST We examine the theoretical properties of the proposed auction format for Medicare Durable Medical Equipment. The format was used in a pilot auction in November 2009 covering nine cities and is planned for use in 100 cities in 2010. Two unusual features of the Medicare auction are 1) non-binding bids and 2) a median pricing rule in which winners are paid the median winning bid, rather than the clearing price where supply and demand balance. We show that these two features lead to complete market failure. Bidders in equilibrium submit low-ball bids resulting in a median below each bidder’s cost. As a result, bidders refuse to sign supply contracts and no quantity is supplied. In sharp contrast, the standard clearing-price auction has each bidder bid true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency. Recent Caltech experiments (Kim et al. 2010) confirm these theoretical findings. Peter Cramton Healthcare http://works.bepress.com/cramton/176 http://works.bepress.com/cramton/176 Fri, 14 Jan 2011 12:28:23 PST On November 2, nearly one year after bids were taken for the Centers for Medicare and Medicaid Services (CMS) auction for durable medical equipment, CMS announced the winning bidders. This paper examines the change in market structure in each of the nine service areas for each of the product categories. The change in market structure is dramatic. The vast majority of existing suppliers both by volume and number will be excluded from supplying Medicare beneficiaries. This radical transformation of the industry is the result of a fatally flawed auction design and not the outcome of an efficient competitive process. The result will be immediate harm to Medicare beneficiaries and the vast majority of Medicare providers in the nine service areas covered by the auction. Beneficiaries will face poor service, selective fulfillment of orders, fraud, and other abuses. Existing suppliers will have to lay off employees and in many cases cease operation. The disruption in terms of job loss and involuntary supplier substitution will be large. Fortunately, the troubled program is still in the pilot stage, so the harm will be limited to the millions of Medicare beneficiaries and thousands of Medicare suppliers in the nine service areas covered in the pilot. Nonetheless, Congress and CMS should immediately stop the implementation of the Round 1 Rebid and move quickly to address the design flaws before the program is scaled up to the entire nation. Peter Cramton Healthcare http://works.bepress.com/cramton/175 http://works.bepress.com/cramton/175 Fri, 14 Jan 2011 12:26:29 PST Peter Cramton Healthcare http://works.bepress.com/cramton/174 http://works.bepress.com/cramton/174 Fri, 14 Jan 2011 12:24:43 PST Peter Cramton Healthcare http://works.bepress.com/cramton/173 http://works.bepress.com/cramton/173 Fri, 14 Jan 2011 12:22:21 PST Peter Cramton Healthcare http://works.bepress.com/cramton/172 http://works.bepress.com/cramton/172 Fri, 14 Jan 2011 11:56:49 PST Peter Cramton Healthcare http://works.bepress.com/cramton/171 http://works.bepress.com/cramton/171 Fri, 14 Jan 2011 10:19:53 PST The emerging field of market design applies auctions and matching to solve resource allocation problems. This paper focuses on auction design, the branch of market design where money is used to facilitate the exchange of goods and services. Within auctions, the paper examines applications involving government regulated resources. Who should use the scarce radio spectrum and at what prices? How should electricity markets be organized? How should financial markets be regulated? And how should runway access be assigned at congested airports? All of these are important questions in major industries. Researchers in market design have made substantial progress in answering these questions over the last fifteen years. The efforts, although at the forefront of theory have been closely tied to practice, and involved interdisciplinary teams of economists, computer scientists, and engineers, all working to solve real problems. Despite this rapid progress, the field holds much promise to provide better answers in even more complex economic environments over the next two decades. The rewards to society from improved markets will be immense. Peter Cramton Market Design http://works.bepress.com/cramton/170 http://works.bepress.com/cramton/170 Fri, 14 Jan 2011 10:18:14 PST We describe a new approach for selling rough diamonds through competitive auctions. The classical approach of De Beers—giving each customer a bag of stones and a take‐it‐or‐leave‐it price—worked well in near monopoly circumstances, but is ill‐suited for competitive producers. Competitive producers, like BHP Billiton, benefit from getting the diamonds to those who value them the most. Beginning in 2008, BHP Billiton introduced a simple auction process to assign its Ekati diamonds to the highest bidders at competitive market prices. A Spot auction, ten times per year, is used to establish prices for each of nineteen deals of diamonds grouped by size, color, and quality. A Term auction allows customers to lock in a long‐term supply commitment at prices indexed to future Spot auctions. A Specials auction, two or three times per year, prices large stones. The auctions use an ascending‐clock format in which prices increase for each product until there is no excess demand. This approach allows customers to discover market prices, while managing portfolio and budget constraints. The approach has proven remarkably successful in pricing and allocating the mine’s output even in the face of the global financial crisis. Peter Cramton Market Design http://works.bepress.com/cramton/169 http://works.bepress.com/cramton/169 Fri, 14 Jan 2011 10:15:28 PST Bargaining often occurs between parties with some shared interest. Partnerships, joint ventures, and cross ownership are examples. We extend standard bargaining models to allow for joint ownership. Joint ownership reduces costly bargaining disputes, as bargainers’ interests are more aligned. We then test the theory with collective bargaining data, where employee stock ownership plans (ESOPs) are the source of joint ownership. The theory predicts that ESOPs will lead to a reduction in strike incidence and the fraction of labor disputes that involve a strike. We examine these predictions using U.S. bargaining data from 1970-1995. The data suggest that ESOPs do increase the efficiency of labor negotiations by shifting the composition of disputes away from costly strikes. Consistent with improved bargaining efficiency, we find that the announcement of a union ESOP leads to a 50% larger stock market reaction as compared to the announcement of a nonunion ESOP. Peter Cramton Bargaining http://works.bepress.com/cramton/168 http://works.bepress.com/cramton/168 Fri, 14 Jan 2011 10:11:57 PST The purpose of this report is to provide decision makers in Colombia (and by extension other countries or regions), who are considering the deployment or consolidation of wind power, with a set of options to promote its use. The options presented are the result of an analysis of the Colombian market; this analysis included simulations and modeling of the country’s power sector, and extensive consultations with operators, managers, and agents. More information on the analysis and simulations is presented in the appendixes. Wind was chosen to exemplify the range of renewable energy alternatives available to complement traditional power sector technologies on the basis of its technical maturity, its relatively low cost compared to other options, the country’s experience, and its wind power potential. This report constitutes the second phase of a barrier analysis to wind energy in Colombia (Vergara et al. 2008). Peter Cramton Electricity and Gas http://works.bepress.com/cramton/167 http://works.bepress.com/cramton/167 Fri, 14 Jan 2011 10:03:57 PST Forward markets, both medium term and long term, complement the spot market for wholesale electricity. The forward markets reduce risk, mitigate market power, and coordinate new investment. In the medium term, a forward energy market lets suppliers and demanders lock in energy prices and quantities for one to three years. In the long term, a forward reliability market assures adequate resources are available when they are needed most. The forward markets reduce risk for both sides of the market, since they reduce the quantity of energy that trades at the more volatile spot price. Spot market power is mitigated by putting suppliers and demanders in a more balanced position at the time of the spot market. The markets also reduce transaction costs and improve liquidity and transparency. Recent innovations to the Colombia market illustrate the basic elements of the forward markets and their beneficial role. Peter Cramton Electricity and Gas http://works.bepress.com/cramton/166 http://works.bepress.com/cramton/166 Fri, 14 Jan 2011 09:58:55 PST Since their advent in 2001, virtual power plant (VPP) auctions have been implemented widely. In this paper, we describe the simultaneous ascending-clock auction format that has been used for virtually all VPP auctions to date, elaborating on other design choices that most VPP auctions have had in common as well as discussing a few aspects that have varied significantly among VPP auctions. We then evaluate the various objectives of regulators in requiring VPP auctions, concluding that the auctions have been effective devices for facilitating new entry into electricity markets and for developing wholesale power markets. Peter Cramton Electricity and Gas http://works.bepress.com/cramton/165 http://works.bepress.com/cramton/165 Fri, 14 Jan 2011 09:39:08 PST The Kyoto summit initiated an international game of cap and trade. Unlike a national cap‐andtrade policy, the essence of this game is the self‐selection of national emission targets. This is like the standard global public‐goods game except that targets are met in the context of a global carbon market. This changes the outcome of the notoriously uncooperative public‐goods game. The equilibrium of the new game may increase or decrease total abatement. If it increases abatement, the resulting carbon price will be no greater than the average public‐goods price. Typically, high abaters in the public goods game will target more abatement in the cap‐and‐trade game, while low abaters will target less. Given such a dismal outcome the Kyoto game should be changed to the global price‐target game. In the same setting where cap‐and‐trade reduces abatement, this game induces optimal abatement. But, realistically, it must include a Green Fund whose strength is linked to the price target. This will induce poor countries to favor as high a price target as rich countries, reversing the polarizing and anti‐cooperative tendencies of cap and trade. Peter Cramton Environmental Markets http://works.bepress.com/cramton/164 http://works.bepress.com/cramton/164 Fri, 14 Jan 2011 09:30:04 PST Greenhouse gas abatement is a public good, so climate policy is a public‐goods game and suffers from the free‐rider incentives that make the outcome of such games notoriously uncooperative. Adopting an international agreement can change the nature of the game, reducing or exacerbating the uncooperative tendencies of the players. We analyze alternative international agreements as variations of the public‐goods game, and examine the incentives for cooperation under each alternative. The addition of cap‐and‐trade rules to the basic public‐goods game is found to polarize the free‐rider incentives of that game, encouraging those who would abate the most to target even higher abatement levels and those who would abate the least to target lower, and even negative, abatement levels. Such polarization between developed and developing countries is familiar from both the Kyoto and Copenhagen climate summits. Since cap‐and‐trade rules decrease cooperation by developing countries, developed countries are led to reject the game’s outcome and in the process prevent agreement on a set of quantity targets. To break this deadlock and shift the equilibrium toward cooperation, a modification of the public‐goods game based on price rather than quantities is needed. This involves a global price target and equity transfers via a Green Fund that rewards adoption of and compliance with such a target. The Nash equilibrium of one such game is analyzed for a group of three countries similar to the United States, China and India. Peter Cramton Environmental Markets global warming, climate change, climate treaty, cap and trade, carbon tax, carbon price, public goods http://works.bepress.com/cramton/163 http://works.bepress.com/cramton/163 Fri, 05 Feb 2010 12:54:15 PST At the international level, a global carbon price is a better form of commitment to reduce carbon emissions than a system of national caps. Peter Cramton and Steven Stoft outline a price-based approach that is simple, effective, and remarkably affordable. Peter Cramton Environmental Markets Q54 http://works.bepress.com/cramton/162 http://works.bepress.com/cramton/162 Tue, 24 Nov 2009 11:54:29 PST Forecasting electricity demand for future years is an essential step in resource planning. A common approach is for the system operator to predict future demand from the estimates of individual distribution companies. However, the predictions thus obtained may be of poor quality, since the reporting incentives are unclear. We propose a prediction market as a form of forecasting future demand for electricity. We describe how to implement a simple prediction market for continuous variables, using only contracts based on binary variables. We also discuss specific issues concerning the implementation of such a market. Peter Cramton Market Design Electricity and Gas http://works.bepress.com/cramton/161 http://works.bepress.com/cramton/161 Tue, 24 Nov 2009 11:50:09 PST We analyze the implications of different pricing rules in discrete clock auctions. The two most common pricing rules are highest-rejected bid (HRB) and lowest-accepted bid (LAB). Under HRB, the winners pay the lowest price that clears the market; under LAB, the winners pay the highest price that clears the market. This pricing difference creates stronger incentives for bid shading under LAB. When bidders seek to maximize profits, the HRB auction maximizes revenues and is fully efficient. The bid shading under LAB means that a bidder may regret losing. Bidders that anticipate this regret may limit bid shading, causing the LAB auction to achieve higher revenues than the HRB auction. Our experiments confirm that this is the case. The LAB auction achieves higher revenues. This also is the case in a version of the clock auction with provisional winners that is commonly used in spectrum auctions. This revenue result may explain the frequent use of LAB pricing despite the efficiency and simplicity advantages of HRB pricing. Peter Cramton Auctions Telecommunications Market Design Experimental Economics http://works.bepress.com/cramton/160 http://works.bepress.com/cramton/160 Tue, 24 Nov 2009 11:39:57 PST Since their advent in 2001, virtual power plant (VPP) auctions have been widely implemented. In this paper, we describe the various design choices that virtually all VPP auctions have had in common and also discuss a few aspects of the auction design that have varied significantly among the VPP auctions to date. We then consider whether VPP auctions have been an effective tool for promoting the objectives of regulators. We find that VPP auctions are effective devices for facilitating new entry into electricity markets and for developing wholesale markets, while they are not particularly well suited to making large reductions in market power in the spot market. Peter Cramton Auctions Market Design Electricity and Gas