DEFINITION of Hockey Stick Bidding
Hockey stick bidding is an anti-competitive bidding practice in which a market participant offers an extremely high price for a small portion of a good or service. The name derives from the price curve that results from this practice, which resembles a hockey stick.
BREAKING DOWN Hockey Stick Bidding
In microeconomic theory, hockey stick bidding involves setting prices of a scarce good or service well above the supplier's marginal cost. This type of bidding strategy of a supplier can work when there is short-term inelasticity of demand for an essential scarce good or service. A typical situation where prices can fall along a hockey stick curve is during an emergency energy shortage, as was the case at least a couple of times in Texas and California in the early 2000s. In an ordinary competitive market of energy suppliers, pricing curves are just slightly above the marginal cost curves. An energy firm that engages in hockey stick bidding for the contract to provide power sets the price of the last incremental unit at a multiple of the last point on the curve with the hope, not expectation, that the buyer's demand inelasticity is so severe that it must accept that last price. If accepted, this price, located along the shaft of the stick (imagine the blade being the flat or gradual sloping-upward part of the stick and the shaft being the near-vertical part), will become the clearing price that the buyer must pay for all provided units of power, giving the energy supplier a windfall of profits.
Legitimate Practice or Gouging?
Firms that have no qualms about hockey stick bidding believe that they are merely participants in a free market. If price spikes occur for an essential good or service, it is a reflection of underinvestment in the sector that the suppliers believe is no fault of their own. More capacity for this good or service would minimize the risk of prices rising to "unfair" levels, these providers assert. On the other side, the public - and perhaps regulators - only see opportunistic price gouging when a purchase must be made at a hockey stick bid. The debate is interesting. Watch for it to flare up again when there is another local energy crunch.