Files
Abstract
In theory, competitive emission permit markets minimise total abatement cost for any emission
ceiling. Permit markets are often imperfectly competitive, however, if they are thin and
dominated by large firms. The dominant firm(s) could exercise market power and increase other
firms’ costs of pollution control, while reducing their own emission control costs. This paper
reports a testbed laboratory experiment to examine whether a dominant firm can exercise market
power in a permit market organised using the double auction trading institution. Our parameters
approximate the abatement costs of sources in a proposed tradable emissions market for the
reduction of nitrogen in the Port Phillip Watershed in Victoria, Australia. We vary across
treatments the initial (pre-trade) allocation of permits to sources, so that in one treatment the
seller of permits is a monopolist and in another treatment the selling side of the market is
duopolistic. We also vary the information that subjects have about the number and abatement
costs of their competitors. We find that prices and seller profits are higher and efficiency is lower
on average in the monopoly sessions compared to the duopoly sessions, but the differences are
not substantial and are not statistically significant due to pronounced variation across sessions.
Moreover, prices, profits and transaction volumes are usually much closer to the competitive
equilibrium than the monopoly equilibrium.