October 1999
Abstract
We conduct a laboratory experiment to investigate whether the double auction institution can suppress market power in emissions trading markets. We study twenty-four markets with varying market structure in a ABA crossover design which controls for subject effects. We find clear evidence of successful use of market power. Average prices rise under monopoly and fall under monopsony. Opening prices are affected much more than closing prices. Profits are redistributed in favour of the agent with power. Efficiency is not affected significantly. Analysis of convergence trends suggests this is not a transitory phenomenon. We interpret our results as evidence of successful price discrimination within a double auction market.
Key Words: Emissions trading, double auctions, market power, tradable permits, price discrimination
JEL Categories: Q28, C91, D42