What is Hockey Stick Bidding?
Hockey stick bidding is a pricing practice in which a seller 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 an upright hockey stick. Regulators have in the past viewed hockey stick bidding as an anti-competitive behavior
- Hockey stick bidding involves a seller setting a asking price well above their cost for a portion of their supply.
- Where demand is highly or perfectly inelastic and the supplier controls enough of the market to set a uniform market price, hockey stick bidding can result in the seller capturing a larger than normal share of profits.
- Some view hockey stick pricing as predatory or anticompetitive behavior where this occurs, but others argue that bidding a price above their marginal cost is simply normal and even beneficial market behavior for sellers.
Understanding Hockey Stick Bidding
In microeconomic theory, it is assumed that in markets sellers seek to maximize profits. Hockey stick bidding involves a market where a seller who faces a highly inelastic demand curve can set their asking price (their bid) of a scarce good or service well above their marginal cost. In certain types of markets where acceptance of a this bid sets a uniform market price, if buyers choose to accept that seller’s bid then this can then set the price at a level that results in outsized profits for all units sold.
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 or a new good for which buyers have little or no information about what the correct price should be. This can occur in markets for basic necessity goods such as electricity or markets for novel goods such as a novel investment or financial instrument. However, unless the seller controls a large enough block of the supply to offer at this price that the buyers cannot respond to the high price by reducing their quantity demanded without cutting into essential or survival needs, then hockey stick bidding is unlikely to lead to any large sustained profit, since buyers can simply hold out for another supplier to offer the good at a more competitive price.
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?
Hockey stick bidding is widely viewed as a predatory or anticompetitive practice by regulators. 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. Investment in more capacity for this good or service would minimize the risk of prices rising to "unfair" levels, these providers assert, and higher prices are what create the incentive for such investment. In this view hockey stick bidding is simply normal competitive behavior that contributes to price discovery and development of a dynamic market. On the other side, the public - and perhaps regulators - only see opportunistic price gouging at the time when a purchase must be made at a hockey stick bid.