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Keep it Down: An Experimental Test of the Truncated Uniform Price Auction

Author

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  • Maurice Doyon
  • Daniel Rondeau
  • Richard Mbala

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 pareticipants 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 a uniform price auction (UPA) to favor buyers who bid low prices. In laboratory experiments, we test this Truncated Uniform Price Auction (T-UPA) against a regular Uniform Price Auction for its ability to decrease equilibrium prices, affect buyer and seller behavior and to assess how it impacts efficiency. The results show that the T-UPA significantly lowers the equilibrium price and results in moderate efficiency losses. Most importantly, the T-UPA effectively counters the market power of oligopolists when demand far outstrips supply. La mise en place d'une enchère centralisée pour l'échange des droits de production dans les secteurs agricoles peut considérablement améliorer le flux d'information parmi les participants au marché, ainsi qu'accroître l'efficacité. Toutefois, les conditions qui règnent dans ces petits marchés peuvent fournir aux vendeurs un avantage de marché, ce qui produit des prix de quotas élevés et limite l'entrée de nouveaux producteurs dans l'industrie. Dans cet article, nous modifions la règle de répartition normale d'une enchère de prix uniforme (UPA) afin de favoriser les acheteurs qui offrent des prix plus faibles. Dans les expériences de laboratoire, nous testons une enchère de prix uniforme «tronquée» (T-UPA) contre une enchère de prix uniforme régulière afin de tester sa capacité de diminuer les prix d'équilibre, d'influencer le comportement de l'acheteur et du vendeur, et d'évaluer son impact sur l'efficacité économique. Les résultats montrent que la T-UPA réduit considérablement le prix d'équilibre et entraîne des pertes d'efficacité modérées. Plus important encore, la T-UPA réussit à contrer le pouvoir de marché des oligopoleurs lorsque la demande dépasse largement l'offre.

Suggested Citation

  • Maurice Doyon & Daniel Rondeau & Richard Mbala, 2009. "Keep it Down: An Experimental Test of the Truncated Uniform Price Auction," CIRANO Working Papers 2009s-43, CIRANO.
  • Handle: RePEc:cir:cirwor:2009s-43
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    File URL: http://www.cirano.qc.ca/files/publications/2009s-43.pdf
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    Keywords

    Auction; uniform; experimental economics; truncated; efficiency; commodity market ; Enchère; uniforme; économie expérimentale; tronquée; efficacité; marché de commodité;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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