Internalizing match-dependent externalities

Andreas Lange and Johannes Ross

Journal of Economic Behavior & Organization, 2024, vol. 218, issue C, 356-378

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.

Keywords: Match-dependent externalities; Market design; Double auction; Electricity markets; Experiment (search for similar items in EconPapers)
JEL-codes: C91 D40 D62 Q4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:218:y:2024:i:c:p:356-378

DOI: 10.1016/j.jebo.2023.12.014

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