Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-08T17:32:38.323Z Has data issue: false hasContentIssue false
  • English
  • Français

Keep It Down: An Experimental Test of the Truncated k-Double Auction

Published online by Cambridge University Press:  15 September 2016

Maurice Doyon ,
Daniel Rondeau  and
Richard Mbala
Maurice Doyon
Affiliation:
Department of Agricultural Economics and Consumer Science at Laval University in Québec, and Fellow of CIRANO in Montréal
Daniel Rondeau
Affiliation:
Department of Economics at the University of Victoria in Victoria, British Columbia
Richard Mbala
Affiliation:
Department of Agricultural Economics and Consumer Science at Laval University in Québec
Get access

Abstract

The introduction of a centralized institution for trading production rights in quota-regulated agricultural sectors can dramatically improve the flow of information among market participants and increase efficiency. On the other hand, prevailing conditions in these small markets can provide sellers with a market advantage, yielding high quota prices that impose important financial costs on quota holders and limit the entry of new producers into the industry. In this paper, we modify the normal allocation rule of the k-double auction (kDA) to counter thin market conditions and to favor buyers who bid low prices. In laboratory experiments, we test the “truncated” kDA (T-kDA) against a regular kDA for its ability to affect buyer and seller behavior and decrease equilibrium prices, and assess how it impacts efficiency. The results show that the T-kDA significantly lowers the equilibrium price and results in moderate efficiency losses. Most importantly, the T-kDA effectively counters the market power of oligopolists when demand far outstrips supply.

Keywords

k-double auctionexperimental economicstruncatedefficiencycommodity market
Type
Contributed Papers
Information
Agricultural and Resource Economics Review , Volume 39 , Issue 2 , April 2010 , pp. 193 - 212
Copyright
Copyright © 2010 Northeastern Agricultural and Resource Economics Association 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alvarez, A., Arias, C., and Orea, L. 2006. “Explaining Differences in Milk Quota Values: The Role of Economic Efficiency.” American Journal of Agricultural Economics 88(1): 182–193.Google Scholar
Back, K., and Zender, J.F. 1993. “Auctions of Divisible Goods: On the Rationale for the Treasury Experiment.” Review of Financial Studies 6(4): 733–764.Google Scholar
Boots, M., Lansink, A.O., and Peerling, J. 1997. “Efficiency Loss Due to Distortions in Dutch Milk Quota Trade.” European Review of Agricultural Economics 24(12): 31–46.CrossRefGoogle Scholar
Bower, J., and Bunn, D. 2001. “Experimental Analysis of the Efficiency of Uniform-Price Versus Discriminatory Auctions in the England and Wales Electricity Market.” Journal of Economic Dynamics and Control 25(3/4): 561–592.Google Scholar
Cason, T., and Friedman, D. 1999. “Price Formation and Exchange in Thin Markets: A Laboratory Comparison of Institutions.” In Howitt, P., de Antoni, E., and Leijonhufvud, A., eds., Money, Markets and Method: Essays in Honour of Robert W. Clower. Cheltenham, UK: Edward Elgar.Google Scholar
Cason, T., and Plott, C. 1996. “EPA's New Emissions Trading Mechanism: A Laboratory Evaluation.” Journal of Environmental Economics and Management 30(2): 133–160.Google Scholar
Chatterjee, A., and Jarrow, R.A. 1998. “Market Manipulation, Price Bubbles, and a Model of the U.S. Treasury Securities Auction Market.” Journal of Financial and Quantitative Analysis 33(2): 255–289.Google Scholar
Cramton, P., and Stoft, S. 2007. “Why We Need to Stick with Uniform-Price Auctions in Electricity Markets.” Electricity Journal 20(1): 26–37.CrossRefGoogle Scholar
Davis, D.D., and Williams, A.W. 1997. “The Effects of Nonstationarities on Performance in Call Markets.” Journal of Economic Behavior and Organization 32(1): 39–54.Google Scholar
Denton, M.J., Rassenti, S.J., and Smith, V.L. 2001. “Spot Market Mechanism Design and Competitivity Issues in Electric Power.” Journal of Economic Behavior and Organization 44(4): 435–453.Google Scholar
Doyon, M. 2001. “The Effect of the Elimination of Federal Milk Marketing Orders on Farm-Level Markets: A Laboratory Experiment.” Canadian Journal of Agricultural Economics 49(3): 353–374.CrossRefGoogle Scholar
Doyon, M., and Rondeau, D. 2006. “Étude D'alternatives d’Accès au Quota D’œufs de Consommation.” Research report, Fédération des producteurs d’œufs de consommation du Québec, Québec.Google Scholar
Doyon, Μ., Simard, V., Messer, K., Tamini, L., and Kaiser, H. 2008. “An Experimental Analysis of Modifications to the Centralized Milk Quota Exchange System in Quebec.” Canadian Journal of Agricultural Economics 56(3): 295–312.Google Scholar
Dubey, P., and Shubik, M. 1980. “A Strategic Market Game With Price and Quantity Strategies.” Zeitschrift für Nationalokonomie 40(12): 25–34.Google Scholar
Fischbacher, U. 2007. “z-Tree: Zurich Toolbox for Ready-Made Economic Experiments.” Experimental Economics 10(2): 171–178.Google Scholar
Friedman, D. 1993. “How Trading Institutions Affect Financial Market Performance: Some Laboratory Evidence.” Economic Inquiry 31(3): 410–435.Google Scholar
Kagel, J.H., and Roth, A.E. 1995. Handbook of Experimental Economics. Princeton, NJ: Princeton University Press.Google Scholar
Krishna, V. 2002. Auction Theory. Burlington, MA: Academic Press (Elsevier).Google Scholar
Satterthwaite, M., and Williams, S., 2002. “The Optimality of a Simple Market Mechanism.” Econometrica 70(5): 1841–1863.Google Scholar
Smith, V.L. 1962. “An Experimental Study of Competitive Market Behavior.” Journal of Political Economy 70: 111–137.Google Scholar
Smith, V.L. 1964. “Effect of Market Organization on Competitive Equilibrium.” Quarterly Journal of Economics 78(1): 181–201.CrossRefGoogle Scholar
Smith, V.L. 1965. “Experimental Auction Markets and the Walrasian Hypothesis.” Journal of Political Economy 73: 387–393.Google Scholar
Smith, V.L. 1976. “Bidding and Auctioning Institutions: Experimental Results.” In Amihud, Y., ed., Bidding and Auctioning for Procurement and Allocation. New York: NYU Press.Google Scholar
Smith, V.L., Williams, A.W., Bratton, W.K., and Vannoni, M.G. 1982. “Competitive Market Institutions: Double Auctions vs. Sealed Bid-Offer Auctions.” American Economic Review 72(1): 58–77.Google Scholar
Van Boening, M.V., Williams, A.W., and LaMaster, S. 1993. “Price Bubbles and Crashes in Experimental Call Markets.” Economics Letters 41(2): 179–185.Google Scholar
Vossler, C., Mount, T., Thomas, R., and Zimmerman, R. 2009. “An Experimental Investigation of Soft Price Caps in Uniform Price Double Auction Markets for Wholesale Electricity.” Journal of Regulatory Economics 36(1): 44–59.Google Scholar
Wilson, R. 1979. “Auctions of Shares.” Quarterly Journal of Economics 93(4): 675–689.Google Scholar
Yoon, K. 2001. “The Modified Vickrey Double Auction.” Journal of Economic Theory 101(2): 572–584.Google Scholar