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Hockey Stick Bidding Definition

What’s Hockey Stick Bidding?

Hockey stick bidding is a pricing observe through which a vendor presents an especially excessive value for a small portion of a superb or service. The title derives from the worth curve that outcomes from this observe, which resembles an upright hockey stick. Regulators have previously considered hockey stick bidding as an anti-competitive conduct.

Key Takeaways

  • Hockey stick bidding entails a vendor setting an asking value effectively above their price for a portion of their provide.
  • The place demand is extremely or completely inelastic and the provider controls sufficient of the market to set a uniform market value, hockey stick bidding can lead to the vendor capturing a bigger than regular share of income. 
  • Some view hockey stick pricing as predatory or anticompetitive conduct the place this happens, however others argue that bidding a value above their marginal price is solely regular and even useful market conduct for sellers.

Understanding Hockey Stick Bidding

In microeconomic idea, it’s assumed that in markets the sellers search to maximise income. Hockey stick bidding entails a market the place a vendor who faces a extremely inelastic demand curve can set their asking value (their bid) of a scarce good or service effectively above their marginal price. In sure forms of markets the place acceptance of this bid units a uniform market value, if patrons select to simply accept that vendor’s bid then this could then set the worth at a stage that leads to outsized income for all models offered. 

This sort of bidding technique of a provider can work when there’s short-term inelasticity of demand for a vital scarce good or service or a brand new good for which patrons have little or no details about what the right value must be. This could happen in markets for fundamental necessity items corresponding to electrical energy or markets for novel items corresponding to a novel funding or monetary instrument. Nonetheless, except the vendor controls a big sufficient block of the availability to supply at this value that the patrons can not reply to the excessive value by decreasing their amount demanded with out reducing into important or survival wants, then hockey stick bidding is unlikely to result in any massive sustained revenue, since patrons can merely maintain out for an additional provider to supply the nice at a extra aggressive value. 

A typical state of affairs the place costs can fall alongside a hockey stick curve is throughout an emergency power scarcity, as was the case not less than a few occasions in Texas and California within the early 2000s. In an atypical aggressive market of power suppliers, pricing curves are simply barely above the marginal price curves. An power agency that engages in hockey stick bidding for the contract to offer energy units the worth of the final incremental unit at a a number of of the final level on the curve with the hope, not expectation, that the client’s demand inelasticity is so extreme that it should settle for that final value.

If accepted, this value, positioned alongside the shaft of the stick (think about the blade being the flat or gradual sloping-upward a part of the stick and the shaft being the near-vertical half), will develop into the clearing value that the client should pay for all offered models of energy, giving the power provider a windfall of income.

Professional Apply or Gouging?

Hockey stick bidding is extensively considered as a predatory or anticompetitive observe by regulators. Companies that don’t have any qualms about hockey stick bidding imagine that they’re merely contributors in a free market. If value spikes happen for a vital good or service, it’s a reflection of underinvestment within the sector that the suppliers imagine isn’t any fault of their very own. Funding in additional capability for this good or service would decrease the danger of costs rising to “unfair” ranges, these suppliers assert, and better costs are what create the inducement for such funding.

On this view, hockey stick bidding is solely regular aggressive conduct that contributes to cost discovery and improvement of a dynamic market. On the opposite facet, the general public – and maybe regulators – solely see opportunistic value gouging on the time when a purchase order have to be made at a hockey stick bid.

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