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Auctioning emission permits in a leader-follower setting

Author

Listed:
  • Alvarez, Francisco
  • André, Francisco J.

Abstract

We analise emission permit auctions under leader-follower competition when the leader bids strategically and the follower acts as price-taker both at the auction and the secondary market. We obtain linear equilibrium bidding strategies for both firms and a unique equilibrium of the auction, which is optimal ex-post for the leader. Under specific distributional assumptions we conclude that the auction always awards less permits to the leader than the cost-effective amount. Our central result is a cautionary note on the properties of auctioning under market power. Under interior solution the auction allocation is dominated by grandfathering in terms of aggregated cost with probability one. As a policy implication, the specific design of the auction turns out to be crucial for cost-effectiveness. The chances of the auction to outperform grandfathering require that the former is capable of diluting the market power that is present in the secondary market.

Suggested Citation

  • Alvarez, Francisco & André, Francisco J., 2015. "Auctioning emission permits in a leader-follower setting," MPRA Paper 61698, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:61698
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    File URL: https://mpra.ub.uni-muenchen.de/61698/1/MPRA_paper_61698.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Cap-and-trade systems; auctions; grandfathering; market power; Bayesian games of incomplete information.;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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