An experimental investigation of bilateral oligopoly in emissions trading markets

Kenta Tanaka, Isamu Matsukawa, Shunsuke Managi

Research output: Contribution to journalArticle

Abstract

Market power in emissions trading has been extensively investigated because emerging markets for tradable emissions permits, such as the European Union's Emissions Trading Scheme (ETS), can be dominated by relatively few large sellers or buyers. Previous studies on market power in emissions trading have assumed the existence of a subset of competitive players. However, a key feature of emissions trading markets is that emissions permits are often traded by a small number of large sellers and buyers. Using a laboratory experiment, our objective in this paper is to test the performance of an emissions trading market utilizing a double auction in a bilateral oligopoly. Our results suggest that the theoretical bilateral oligopoly models can better describe market outcomes of emissions trading. The effects of the slope of the marginal abatement cost function on market power in laboratory experiments are found to be consistent with those predicted by the theoretical bilateral oligopoly model. How market power is exercised depends on the curvature of the abatement cost function. If the marginal abatement cost function of buyers (sellers) is less steep than that of sellers (buyers), the price of permits is lower (higher) than that under perfect competition. This is because the market power of buyers (sellers) exceeds that of sellers (buyers). The price of permits is close to the perfect competitive price when all traders have the sameslope of the marginal abatement cost function.

Original languageEnglish
Article number101349
JournalChina Economic Review
Volume59
DOIs
Publication statusPublished - Feb 2020

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Laboratory experiments
Bilateral oligopoly
Seller
Emissions trading
Market power
Buyers
Cost function
Marginal abatement costs
Emission permits
Competitive prices
Double auction
Emerging markets
Perfect competition
Curvature
Abatement costs
Emissions trading scheme
Tradable emission permits
European Union
Traders

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

An experimental investigation of bilateral oligopoly in emissions trading markets. / Tanaka, Kenta; Matsukawa, Isamu; Managi, Shunsuke.

In: China Economic Review, Vol. 59, 101349, 02.2020.

Research output: Contribution to journalArticle

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