Efficiency of a Two-stage Market for Capacity Allocation

Forward markets allow buyers and sellers of resources like network bandwidth or power to plan their consumption and production respectively. However, random events (e.g. weather affecting power demand, news events compelling users to use a communication network) can happen after the market and before consumption that affects demand and or production of the resource. A spot market that happens contemporaneously with production and consumption has the advantage that market participants act after the outcomes of such random events are known. A two-stage forward-spot market, has the potential of enjoying the benefits of both kinds of market allowing participants to plan in advance while also responding to random shocks. However, a two-stage market might introduce the possibility for a strategic player to manipulate the market by creating an arbitrage between the two stages, leading to inefficiency. In this talk, we investigate how the efficiency of two stage markets compares with a single stage market with price anticipating users. We show that the fundamental efficiency limit of a two-stage market for a fixed, divisible resource and buyers with linear utility functions can be no worse than 2√2−2 ≈ 82.8%. This compares to 75% worst-case efficiency previously known for single stage markets.