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Auction Design for the Allocation of Emission Permits in the Presence of Market Power

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  • Kjell Sunnevåg
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    Abstract

    To the extent that emission permits have been allocated using market mechanisms, this has been done using a sealed-bid auction design, typically with discriminatory prices. However, several authors have recommended the ascending auction format. Basically, two “competing” ascending auction designs have been suggested, the standard ascending auction (with clock or demand schedules), or an alternative ascending-clock implementation of Vickrey-pricing. The latter design was introduced as a response to problems of bid shading under the sealed-bid and the standard ascending auction format. The purpose of this paper is to investigate the allocation of permits under these two alternative mechanisms. The auction process and the resulting market outcome in the presence of oligopolistic competition are simulated. In this setting, it is not obvious that bid shading is the optimal strategy under the standard design, nor is it obvious that sincere bidding is the optimal strategy under the alternative ascending auction design. The alternative auction format makes it less costly to pursue a strategy to increase market shares through the acquisition of emission permits, thus increasing the competitor's costs, leading to overbidding as the optimal strategy. Copyright Kluwer Academic Publishers 2003

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    File URL: http://hdl.handle.net/10.1023/B:EARE.0000003583.49609.c7
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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 26 (2003)
    Issue (Month): 3 (November)
    Pages: 385-400

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    Handle: RePEc:kap:enreec:v:26:y:2003:i:3:p:385-400

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    Web page: http://www.springerlink.com/link.asp?id=100263

    Related research

    Keywords: auctions; imperfect competition; multi-item auctions; oligopoly; strategic interaction; tradable emission permits;

    References

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    1. Eftichios Sartzetakis, 1997. "Tradeable emission permits regulations in the presence of imperfectly competitive product markets: Welfare implications," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(1), pages 65-81, January.
    2. Peter Cramton & Suzi Kerr, 2002. "Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Papers of Peter Cramton 02eptc, University of Maryland, Department of Economics - Peter Cramton, revised 06 May 2002.
    3. Hanley, Nick D & Moffatt, Ian, 1993. "Efficiency and Distributional Aspects of Market Mechanisms in the Control of Pollution: An Empirical Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 40(1), pages 69-87, February.
    4. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
    5. Hahn, Robert W, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 753-65, November.
    6. Peter Cramton, 1998. "Ascending Auctions," Papers of Peter Cramton 98eer, University of Maryland, Department of Economics - Peter Cramton, revised 28 Jul 1998.
    7. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
    8. Malueg, David A., 1990. "Welfare consequences of emission credit trading programs," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 66-77, January.
    9. Lawrence M. Ausubel & Peter Cramton, 1997. "Auctioning Securities," Papers of Peter Cramton 98wpas, University of Maryland, Department of Economics - Peter Cramton, revised Mar 1998.
    10. V.V. Chari & Robert J. Weber, 1992. "How the U.S. Treasury should auction its debt," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-12.
    11. Fershtman,C. & de Zeeuw,A., 1995. "Tradeable Emission Permits in Oligopoly," Papers 45-95, Tel Aviv - the Sackler Institute of Economic Studies.
    12. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
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    Cited by:
    1. Mehdi Fadaee & Luca Lambertini, 2012. "Non-Tradeable Pollution Permits as Green R&D Incentives," Working Paper Series 43_12, The Rimini Centre for Economic Analysis.

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