IDEAS home Printed from https://ideas.repec.org/p/exe/wpaper/2611.html

Avoidable Costs and Market Design

Author

Listed:
  • Jacob K. Goeree

    (School of Economics, University of New South Wales)

  • Luke Lindsay

    (Department of Economics, University of Exeter)

  • Xavier Del Pozo

    (Innovation Process Technology AG)

Abstract

Virtually all producers, most notably airlines and electricity generators, face avoidable fixed costs that cause non-convexities in production. Standard bilateral trading institutions such as the continuous double auction produce inefficient and unstable outcomes in the presence of avoidable costs. We design a package market that allows traders to submit schedules of quantity-contingent bids. In an experiment, we compare two continuous double-auction formats to two schedule-based variants. The new mechanisms substantially outperform the continuous double auctions, both in efficiency and in preventing seller losses. Efficiency is highest when schedules can be revised in continuous time. The mechanisms that allow sellers to express non-convex costs restore efficiency in markets where bilateral trading institutions fail.

Suggested Citation

  • Jacob K. Goeree & Luke Lindsay & Xavier Del Pozo, 2026. "Avoidable Costs and Market Design," Discussion Papers 2611, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:2611
    as

    Download full text from publisher

    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP2611.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Elmaghraby, Wedad J. & Larson, Nathan, 2012. "Explaining deviations from equilibrium in auctions with avoidable fixed costs," Games and Economic Behavior, Elsevier, vol. 76(1), pages 131-159.
    2. Barbara Ikica & Simon Jantschgi & Heinrich H Nax & Diego G Nuñez Duran & Bary S R Pradelski, 2023. "Competitive market behavior: convergence and asymmetry in the experimental double auction," Post-Print hal-04367512, HAL.
    3. Jeffrey S. Banks & John O. Ledyard & David P. Porter, 1989. "Allocating Uncertain and Unresponsive Resources: An Experimental Approach," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 1-25, Spring.
    4. Brewer, Paul J. & Plott, Charles R., 1996. "A binary conflict ascending price (BICAP) mechanism for the decentralized allocation of the right to use railroad tracks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 857-886, October.
    5. Goeree, Jacob K. & Lindsay, Luke, 2016. "Market design and the stability of general equilibrium," Journal of Economic Theory, Elsevier, vol. 165(C), pages 37-68.
    6. Anthony M. Kwasnica & John O. Ledyard & Dave Porter & Christine DeMartini, 2005. "A New and Improved Design for Multiobject Iterative Auctions," Management Science, INFORMS, vol. 51(3), pages 419-434, March.
    7. Hendershott, Terrence & Wee, Marvin & Wen, Yuanji, 2022. "Transparency in fragmented markets: Experimental evidence," Journal of Financial Markets, Elsevier, vol. 59(PA).
    8. Van Boening, Mark V & Wilcox, Nathaniel T, 1996. "Avoidable Cost: Ride a Double Auction Roller Coaster," American Economic Review, American Economic Association, vol. 86(3), pages 461-477, June.
    9. Barbara Ikica & Simon Jantschgi & Heinrich H. Nax & Diego G. Nuñez Duran & Bary S. R. Pradelski, 2023. "Competitive Market Behavior: Convergence And Asymmetry In The Experimental Double Auction," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 1087-1126, August.
    10. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    11. Cason, Timothy N. & Friedman, Daniel, 1996. "Price formation in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1307-1337, August.
    12. Davis, Douglas D. & Williams, Arlington W., 1997. "The effects of nonstationarities on performance in call markets," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 39-54, January.
    13. Lester G. Telser, 1994. "The Usefulness of Core Theory in Economics," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 151-164, Spring.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Comola, Margherita & Fafchamps, Marcel, 2026. "Experimental evidence on covert bargaining markets," Journal of Economic Behavior & Organization, Elsevier, vol. 242(C).
    2. Pallab Sanyal, 2016. "Characteristics and Economic Consequences of Jump Bids in Combinatorial Auctions," Information Systems Research, INFORMS, vol. 27(2), pages 347-364, June.
    3. Gediminas Adomavicius & Alok Gupta & Mochen Yang, 2022. "Bidder Support in Multi-item Multi-unit Continuous Combinatorial Auctions: A Unifying Theoretical Framework," Information Systems Research, INFORMS, vol. 33(4), pages 1174-1195, December.
    4. Avenali, Alessandro, 2009. "Exploring the VCG mechanism in combinatorial auctions: The threshold revenue and the threshold-price rule," European Journal of Operational Research, Elsevier, vol. 199(1), pages 262-275, November.
    5. Wellman, Michael P. & Walsh, William E. & Wurman, Peter R. & MacKie-Mason, Jeffrey K., 2001. "Auction Protocols for Decentralized Scheduling," Games and Economic Behavior, Elsevier, vol. 35(1-2), pages 271-303, April.
    6. Gediminas Adomavicius & Shawn P. Curley & Alok Gupta & Pallab Sanyal, 2012. "Effect of Information Feedback on Bidder Behavior in Continuous Combinatorial Auctions," Management Science, INFORMS, vol. 58(4), pages 811-830, April.
    7. Paul J. Brewer & Charles R. Plott, 2002. "A Decentralized, Smart Market Solution to a Class of Back-Haul Transportation Problems: Concept and Experimental Test Beds," Interfaces, INFORMS, vol. 32(5), pages 13-36, October.
    8. Soumyakanti Chakraborty & Anup K. Sen & Amitava Bagchi, 2015. "Addressing the valuation problem in multi-round combinatorial auctions," Information Systems Frontiers, Springer, vol. 17(5), pages 1145-1160, October.
    9. Bourbeau, Benoit & Gabriel Crainic, Teodor & Gendreau, Michel & Robert, Jacques, 2005. "Design for optimized multi-lateral multi-commodity markets," European Journal of Operational Research, Elsevier, vol. 163(2), pages 503-529, June.
    10. Ching-Hua Chen-Ritzo & Terry P. Harrison & Anthony M. Kwasnica & Douglas J. Thomas, 2005. "Better, Faster, Cheaper: An Experimental Analysis of a Multiattribute Reverse Auction Mechanism with Restricted Information Feedback," Management Science, INFORMS, vol. 51(12), pages 1753-1762, December.
    11. Sayee Srinivasan, 2002. "Trading Portfolios Electronically – An Experimental Approach," Netnomics, Springer, vol. 4(1), pages 39-71, March.
    12. Lunander, Anders & Lundberg, Sofia, 2009. "Do Combinatorial Procurement Auctions Lower Cost? - An Empirical Analysis of Public Procurement of Multiple Contracts," Umeå Economic Studies 776, Umeå University, Department of Economics, revised 16 Sep 2009.
    13. Laurent Lamy, 2007. "Contingent Auctions with Allocative Externalities : Vickrey Versus the Ausubel-Milgrom Proxy Auction," Working Papers 2007-26, Center for Research in Economics and Statistics.
    14. Milam, Garrett, 2006. "A laboratory study of haggling with deadlines," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 505-520, May.
    15. Gallien, Jérémie. & Wein, Lawrence M., 2003. "Design and analysis of a smart market for industrial procurement," Working papers WP 4137-00., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    16. Benoît Bourbeau & Teodor Gabriel Crainic & Michel Gendreau & Jacques Robert, 2003. "Design for Optimized Multi-Lateral Multi-Commodity Markets," CIRANO Working Papers 2003s-36, CIRANO.
    17. Cason, Timothy N. & Friedman, Daniel & Milam, Garrett H., 2003. "Bargaining versus posted price competition in customer markets," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 223-251, February.
    18. Flecke, Sarah Lynn & Bachler, Sebastian, 2025. "Conducting real-time interactive experiments online: A guide for researchers," Journal of Behavioral and Experimental Finance, Elsevier, vol. 48(C).
    19. Chernomaz, Kirill & Levin, Dan, 2012. "Efficiency and synergy in a multi-unit auction with and without package bidding: An experimental study," Games and Economic Behavior, Elsevier, vol. 76(2), pages 611-635.
    20. Munro, David R. & Rassenti, Stephen J., 2019. "Combinatorial clock auctions: Price direction and performance," Games and Economic Behavior, Elsevier, vol. 117(C), pages 195-217.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:exe:wpaper:2611. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sebastian Kripfganz (email available below). General contact details of provider: https://edirc.repec.org/data/deexeuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.