Market Power in Emissions Trading Markets Ruled by a Multiple Unit Double Auction: Further Experimental Evidence

Abstract

We discuss selected methodological problems of previous Double Auction (DA) experiments and test the hypothesis that a Multiple Unit Double Auction (MUDA) is able to prevent market power in an emissions trading market. Additionally, we analyze how the information subjects receive about the market structure and different levels of subjects’ experience influence the behavior. Based on a larger number of independent observations than analyzed in previous studies, the experiment generates two main results. First, emissions trading markets ruled by a MUDA realize a high degree of efficiency even under market power conditions. However, a MUDA is, in general, not able to restrict market power. We observe persistent price discrimination in two market power environments, i.e., the distribution of profits is strongly shifted in favor of the strong market side without greatly harming efficiency. This result is independent of the information to subjects about the market structure. Second, when subjects are experienced, the efficiency is higher and the ability of the strong market side to exercise market power declines strongly. However, the variability of behavior is large and the strong market side is still able to realize supracompetitive profits in some groups.