Internalizing Match-dependent Externalities

Andreas Lange, Johannes Ross*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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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.
Original languageEnglish
JournalJournal of Economic Behavior & Organization
Volume218
Pages (from-to)356-378
Number of pages23
ISSN0167-2681
DOIs
Publication statusPublished - Feb 2024

Bibliographical note

Published online: 21 December 2023.

Keywords

  • Match-dependent externalities
  • Market design
  • Double auction
  • Electricity markets
  • Experiment

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