McMaster
Experimental Economics Laboratory R.
Andrew Muller
Experimental Tests of Market Power in Emission Trading Markets
R. W. Godby, University of Wyoming
Stuart Mestelman, McMaster University
R. Andrew Muller, McMaster University
Correspondance to
R. Andrew Muller
Department of Economics
McMaster University
Hamilton, Ontario
Canada L8S 4M4
e-mail: mullera@mcmaster.ca
July 1998
Abstract
Laboratory investigations of emissions trading markets in competitive
environments generally confirm that emissions trading raises market
efficiency and that simple markets converge rapidly to the competitive
equilibrium. Little work, however, has been done to investigate
emissions trading markets where one or more participants in have market
power. Theory suggests that exploitation of market power could reduce or
eliminate the gains from emission trading, particularly when the firms
trading emission permits also compete in downstream markets.
Experimental research into market power suggests that some trading
institutions, especially the double auction, may be better than others
in preventing market power from emerging. The most recent work has shown
that even the double-auction may be susceptible to the influence of
market power in emission permit markets, especially when participanats
compete both in permit and downstream markets. These market power
effects have been shown to reduce the performance of some laboratory
markets, in some cases leading to outcomes inferior those from
command-and-control regulation.
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