What is Hockey Stick Bidding?
Hockey stick bidding is a pricing practice in which a seller places an extremely high price on 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 an 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 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. This is similar to peak pricing or congestion pricing, where suppliers set exceptionally high prices during periods of high demand.
Hockey stick bidding works when there is short-term inelasticity of demand for a scarce good or service. This can occur in markets for basic necessity goods such as electricity, or for novel goods such as innovative financial instruments. However, unless the seller controls enough of the supply that the buyers cannot simply seek another supplier, this strategy is unlikely to lead to a sustained profit.
Example of Hockey Stick Bidding
Hockey stick bidding often results in high prices during an emergency energy shortage, as has happened several times in Texas and California. Electricity prices are set in a public auction, with a uniform price for every unit of energy sold in the same time period. Since every unit is paid at the same clearing price, a single hockey-stick bid can result in an extraordinary windfall for every provider.
For example, during the 2001 California energy crisis, several energy providers successfully submitted hockey stick bids to raise the price of energy. One of these companies was Enron, which bid "almost exclusively" at the state maximum price of $750.
During one Texas ice storm, the state energy provider "was forced to procure all the offered balancing energy for many hours. One megawatt offered at $990 per hour... set the clearing price for all the procured balancing energy for several hours. That resulted in settlements millions of dollars in excess of what they would have been if that last megawatt would have not set the clearing price."
Legitimate Practice or Gouging?
Many regulators consider hockey-stick pricing to be anti-competitive, or a form of market manipulation. Many electricity regulators have price caps to prevent excess bids from suppliers.
On the other hand, some generators have argued that elevated prices represent an important free market price signal. If price spikes occur for an essential good or service, it is a reflection of underinvestment in the sector. Investment in more capacity for this good or service would reduce the risk of prices rising, according to this view, and higher prices create incentives for such investment.