Breaking Collusion in Auctions through Speculation: An Experiment on CO₂ Emission Permit Markets

Abstract

The European Emission Trading Scheme (EU-ETS) has chosen to adopt an auctioning procedure to initially allocate CO 2 emission permits. Free allocation of permits will become an exception for the third phase (2013-2020) and most firms will have to buy all their permits on the market or via auctions. The ability of bidders to collude is a key concern about the design of the auction format. To counter collusion, the auction can be open to bidders without compliance obligations (speculators). This paper aims at studying experimentally speculation as a collusion-breaking device in two different auction mechanisms: the uniformprice sealed-bid auction and the ascending clock auction. Our results suggest that a uniform sealed-bid auction open to speculators should be chosen from a revenue maximization point of view. In this mechanism, compliance agents adopt an aggressive strategy toward speculators. This strategy significantly increases the seller's revenue, compared to the more collusive clock auction. In the latter, on the contrary, bidders accommodate speculators, letting them buy permits in the auction and buying their necessary permits on the secondary market. However, as opening the auction to speculators deteriorates efficiency, the regulator faces a trade-off between these two objectives.

Auction Format and Auction Sequence in Multi‐item Multi‐unit Auctions: An Experimental Study

“…Most experimental studies on emission permits and similar markets deal with multiple identical units of only one item (Cason and Plott, 1996;Burtraw et al, 2009;Mougeot et al, 2011). Even in this case there is no consensus on which format is suited best for auctioning emission permits (see also Section 1).…”

Entry by Successful Speculators in Auctions with Resale

“…15 A subject was only allowed to participate in one session of one treatment. Table 3.1 shows the number of subjects who participated in each treatment.…”

“…Although there are multiple equilibria in this environment, we highlight that with one speculator in the auction there is an equilibrium in which both the speculator and bidder bid a positive 1 See, for example, the discussion of the European Emission Trading Scheme in Mougeot et al (2011). 2 Xu, Levin, and Ye (2013) highlight that "resale naturally induces a speculative motivation for entry."…”

“…5 Most closely related to our paper is the examination of emission permits markets by Mougeot et al (2011). The authors analyze the role of speculators in breaking collusion in sealed-bid and ascending multi-unit auctions and show that bidders are more likely to collude and accommodate speculators in an ascending rather than in a sealed-bid auction.…”

“…The authors analyze the role of speculators in breaking collusion in sealed-bid and ascending multi-unit auctions and show that bidders are more likely to collude and accommodate speculators in an ascending rather than in a sealed-bid auction. While Mougeot et al (2011) highlight di¤erences in auction formats, we focus on the response of bidders and speculators to entry choices by speculators and to changes in the number of speculators.…”