Hockey Stick Bidding
What Is Hockey Stick Bidding?
Hockey stick bidding is a pricing practice in which a seller puts a very high price on a small portion of a decent or service. The name gets from the price curve that outcomes from this practice, which looks like an upstanding hockey stick. Regulators have in the past seen hockey stick bidding as hostile to cutthroat behavior.
Understanding Hockey Stick Bidding
In microeconomic theory, it is assumed that sellers try to augment profits. Hockey stick bidding includes a market where a seller who faces a highly inelastic demand curve can set their asking price (their bid) of a scant decent or service well over their marginal cost. This is like [peak pricing](/top pricing) or congestion pricing, where providers set incredibly high prices during periods of high demand.
Hockey stick bidding works when there is short-term inelasticity of demand for a scant decent or service. This can happen in markets for essential necessity goods like power, or for novel goods like imaginative financial instruments. In any case, except if the seller controls enough of the supply that the purchasers can't just look for another provider, this strategy is probably not going to lead to a supported profit.
Illustration of Hockey Stick Bidding
Hockey stick bidding frequently brings about high prices during an emergency energy shortage, as has happened several times in Texas and California. Power prices are set in a public auction, with a uniform price for each unit of energy sold in a similar time span. Since each unit is paid at a similar clearing price, a single hockey-stick bid can bring about an extraordinary windfall for each provider.
For instance, during the 2001 California energy crisis, several energy providers effectively submitted hockey stick bids to raise the price of energy. One of these companies was Enron, which bid "solely" at the state maximum price of $750.
During one Texas ice storm, the state energy provider "was forced to secure all the offered adjusting energy for a long time. One megawatt offered at $990 each hour... set the clearing price for all the obtained adjusting energy for several hours. That brought about settlements a large number of dollars in excess of what they would have been in the event that that last megawatt would have not set the clearing price."
Genuine Practice or Gouging?
Numerous regulators consider hockey-stick pricing to be hostile to cutthroat, or a form of market manipulation. Numerous power regulators have price covers to prevent excess bids from providers.
Then again, a few generators have contended that raised prices address an important free market price signal. In the event that price spikes happen for an essential decent or service, it is an impression of underinvestment in the sector. Investment in greater capacity for this great or service would reduce the risk of prices rising, as per this view, and higher prices make incentives for such investment.
Highlights
- Where demand is highly or completely inelastic and the provider controls enough of the market to set a uniform market price, hockey stick bidding can bring about the seller catching a bigger than normal share of profits.
- Hockey stick bidding includes a seller setting a requesting price well over their cost for a portion from their supply.
- Some view hockey stick pricing as predatory or anticompetitive behavior where this happens, however others contend that bidding a price over their marginal cost is just normal and, surprisingly, beneficial market behavior for sellers.
