Capacity Auctions: VCG Mechanism vs. Submodularity

5^th November 2019, 13:00 Ashton Lecture Theater
Prof. Bo Chen
Warwick Business School
University of Warwick

Abstract

Using energy supply as an example, we study a form of capacity mechanism that combines capacity and supply auctions. We characterize how participants bid in this auction and show that, on a pay-as-bid basis, an equilibrium behaviour gives Vickrey-Clarke-Groves (VCG) profits and achieves efficient outcomes when there is submodularity, which is in stark contrast with what in the existing literature — at equilibrium VCG payments achieve truthful bids and efficiency. We also provide some necessary and sufficient conditions for submodularity.