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Internalizing match-dependent externalities

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  • Lange, Andreas
  • Ross, Johannes

Abstract

External effects can be triggered through trade and depend on the locations of buyers and sellers who are matched. Inspired by electricity markets, we experimentally investigate markets in which net trades between two locations induce social costs. Based on a modified double auction setting, we compare the performance of market platforms that are location-blind with those where information on the location of (potential) trading partners or the level of the externality is given. We demonstrate that locational information is sufficient to reduce the externality. Imposing the full external costs on individual trades leads to maximal price differentiation between locations and further reduces net trades, while welfare improvements are limited. Reasons for not achieving the typically high efficiency of double auctions are discussed.

Suggested Citation

  • Lange, Andreas & Ross, Johannes, 2024. "Internalizing match-dependent externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 356-378.
    • Handle: RePEc:eee:jeborg:v:218:y:2024:i:c:p:356-378
    DOI: 10.1016/j.jebo.2023.12.014
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    More about this item

    Keywords

    Match-dependent externalities; Market design; Double auction; Electricity markets; Experiment;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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