Transcript Document 7530060

Keep it Down:
An Experimental Test of the Truncated Uniform Price Auction
Maurice Doyon
Daniel Rondeau
Richard Mbala
2009 NAREA Workshop on Experimental Methods in
Environmental, Natural Resource, and Agricultural
Economics
Faculté des sciences de l’agriculture
et de l’alimentation
Université Laval
Outline
• Context
• Research objectives
• The truncated uniform price auction
• Experimental design
• Results
• Closing remarks
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Context
• Since 1972, Canadian egg producers are required by law to
hold a production permit (quota) for the laying hens they own.
• Supply control generates oligopoly rents and makes
individual transferable quota highly valuable.
• In the egg industry (as in other agricultural quota markets
such as milk and chicken), prevailing conditions tend to
provide sellers with a distinct advantage and tend to yield
high quota prices.
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Context
• High quota prices are a concern for Quebec’s egg producers
for two central reasons.
• Large sums of money are capitalized into this non-productive
asset (Boots et al 1997, Alvarez et al 2006).
• Detrimental to a renewal of the industry, making it difficult for
young individuals to become producers.
• No official market exist for «laying hens» and a few feed
suppliers have become de facto quota brokers
• Feed suppliers have an informational advantage and
purchase much of the available quota and tie its resale to
exclusive long terms input contracts
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Context
• It is within this context that the Quebec Federation of Egg
Producers decided to create a centralized market institution
for quota trading.
• The objective of the Federation is to implement a market
mechanism that fosters efficient trading of a relatively low
volume of units and provides the strongest possible
protection against aggressive oligopoly pricing emerging from
a small number of sellers when demand substantially
outstrips supply.
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Objectives
• Doyon and Rondeau (2006) explored various market designs
that could potentially meet the prerogatives of Quebec egg
producers.
• They concluded that a truncated Uniform Price Auction (UPA)
has interesting characteristics that should be tested.
• Therefore, the objective of this study is to test the effect of the
truncation rule on market price, buyers and sellers bids, the
number of unit traded and economic efficiency
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Truncation rule
• Uniform price auctions are efficient since they ensure that buyers
with the highest subjective valuations for goods obtain those
goods and, in exchange, sellers receive returns that approximate
the totality of this value (Ausubel and Cramton 2002, Khrisna
2002).
• Any intervention aimed at modifying the outcome of a uniform
price auction is likely to reduce the efficiency of that auction
• Doyon et al. (2008) have explored modifying a UPA with a tax
on units offered but not sold and excluding highest bidders and
offers from the bid and asks schedules. Experimental results
indicate that they achieved little price reduction at the expense of
important loss of efficiency
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Truncation rule
• Under the T-UPA, both buyers and sellers are invited to submit bids
and asks consisting of the number of units they wish to buy or sell,
and the price at which they are prepared to buy or sell respectively.
• While multiple units are involved, a restriction is imposed that
participants can only submit a single bid or ask
• The intersection of the bid and ask curves determines the quantity
that will be supplied to the market. In standard UPA, the units to be
sold are those starting with the lowest asking price on the supply
curve, moving sequentially up to the intersection of the bid and ask
functions. This rule is not changed in presence of the truncation
rule.
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Truncation rule
• Whereas a standard UPA simply allocates the units in decreasing
order of bid price, the T-UPA favors bidders on extra-marginal
units.
• Bidders are declared eligible to purchase some of the traded units
as long as their bid price is equal or greater than the price asked
by the seller of the last unit (the unit at the intersection of the bid
and ask curves).
• In a reversal of normal rules, the units are sold in priority to
bidders who submitted the lowest price bids rather than the
highest
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Truncation rule
G
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Experimental design
• Two sets of experiments were conducted to compare the impact
of the T-UPA against the UPA. In all cases, the underlying design
and parameters were identical across all experiments.
• In all sessions, the market was made up of seven buyers and five
sellers who kept the same role for a total of thirty periods of
market interaction with each other.
• Subject could visually determine that there were twelve
participants in the market, but were not told how many were
buyers and sellers
• All information on quantities and reserve prices (induced values)
was private and confidential
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Experimental design
• The subject’s task in each round was to submit a bid or ask
containing two piece of information: 1) the number of units offered
(seller) or sought (buyer); and 2) the price they were prepared to
transact at.
• At the end of each period, each individual privately received their
personal results in the form of the number of units he/she
transacted, the market clearing price and their personal profits.
• The first six periods of this experiment were unpaid practice
rounds. Each of these periods implemented different vectors of
market parameters (individual quantities and reserve prices),
allowing participants to familiarize themselves with their task, the
operations of the computer interface and the impact of their
decisions
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Experimental design
• The experiment then proceeded with three sets of eight periods
each, generating real earnings. During each set, the same overall
vector of market parameters were kept, but rotated across
participants with each new period.
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Experimental design
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Experimental design
• The experiments were implemented using z-tree and conducted at
the CIRANO laboratory for experimental economics in Montreal,
Canada.
• Subjects were university students from all disciplines recruited via
email invitations using the laboratory’s standing list of student
volunteers.
• Individuals were randomly assigned to their role of buyer or seller.
They received oral explanations and instructions.
• Sessions lasted approximately 90 minutes and participants
received between $18 and $50, (including a $5 show up fee).
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Results
Number of Unique Participants and Number of Individual Observations (decisions) by Model Economy
Unique Buyers/Sellers UPA
Unique Buyers/Sellers T-UPA
Total Unique Buyers/Sellers
Number of Bids/Asks UPA
Number of Bids/Asks T-UPA
Total Bids/Asks
Model A
70/50
77/55
147/105
560/400
616/440
1176/840
Model B
21/15
21/15
42/30
168/120
168/120
336/240
Model C
21/15
21/15
42/30
168/120
168/120
336/240
Total
182/130
119/85
301/215
1456/1040
952/680
2408/1720
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Results-Transaction Prices
• Result 1: The uniform transaction price under the T-UPA
allocation rule is significantly lower than under the UPA rule.
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Results-Number of Units Traded
• Result 2: The T-UPA results in a smaller number of units traded
than the UPA allocation rule
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Results-Market Efficiency
• Result 3: For the experimental conditions implemented in this
study, the T-UPA captures 15 points of percentage less of the
potential gains from trade than the UPA
UPA
T-UPA
Theoretical prediction for
perfect competition
P-value
Periods 1 à 8
(Model A)
88,8%
76,1%
100%
<0
Periods 9 à 16
(Model B)
97,1%
77,9%
100%
<0
Periods 17 à 24
(Model C)
93,3%
74,3%
100%
<0
91,3%
76,1%
Total
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Results-Market Efficiency
• Two factors contribute to the loss of efficiency.
• First, is the loss associated with a sub-optimal number of units
traded already noted
• Second, the “misallocation” of units to extra-marginal buyers
and sellers.
• Result 4: Units defined as extra-marginal based on the underlying
distributions of reserve prices are more likely to be traded in the
T-UPA auction and contribute significantly to lowering the
efficiency of the market rule.
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Results-Market Efficiency
•For the regular UPA, and across all markets in the dataset, only
1.05% of the 5,507 units exchanged in our experiments were
extra-marginal on the demand side.
•In contrast, this proportion climbs to 10.3% of the 5,542 units
traded in the T-UPA.
•This confirms that the T-UPA rule provides significant
opportunities for less efficient buyers to purchase units
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Results-Buyer Behavior
• Result 5: Buyers submit significantly lower bids in the T-UPA than
in the UPA
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Results-Seller Behavior
• Mixed results
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Results-Seller Behavior
• the T-UPA produced much less volatility in Model B and
substantially reduced average sellers bids to reach 174%, a value
in line with the other Models.
Average Bids Submitted by Sellers as a Percentage of their Induced, Aggregated by Models
UPA
T-UPA
Theoretical prediction
for perfect competition
P-value
Periods 1 à 8
(Model A)
152%
159%
100%
0,61
Periods 9 à 16
(Model B)
267%
174%
100%
<0
Periods 17 à 24
(Model C)
184%
164%
100%
0,25
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Closing remarks
• The truncated rule significantly reduces market clearing price. It
does so by significantly reducing buyers’ bids and by reducing the
asking price of sellers in extreme market conditions, when sellers
have shown an ability to exercise market power in a standard
uniform price auction.
• In situation of large excess demand and wide difference between
the reserve prices of the marginal buyer and seller, the truncated
rule was able to dramatically reduce the ability of sellers to push
the equilibrium price up.
• This is an important finding since this type of conditions
underlying thin markets such as quota market in agricultural
sectors or in other sector could benefit from this type of market
design.
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Closing remarks
• However, reduction in market clearing price and the ability to
mitigate market power of sellers in certain market conditions
come to a cost.
• This cost is a drop in the number of units transacted and an
undesirable allocation of some units to buyers who value them
less than some excluded participants. These combined effects
result in a loss of efficiency in the order of 15% in average in our
experiment.
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Closing remarks
• Nevertheless, these results compare advantageously with the
modifications to the uniform price auction market tested by Doyon
et al (2008).
• To reach a mere 5% reduction in market clearing price, 50% of
the unit traded and 52 point percentage in efficiency were
sacrificed.
• In Model B, a 51% reduction over the non competitive market
price is obtained in exchange of a loss 4% in the number of unit
traded and an efficiency loss of 19 points percentage.
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Closing remarks
• These differences could be explained by the flexibility of the
truncated rule, as opposed to an exclusion rule as tested by
Doyon et al (2008).
• While the exclusion would be fixed and would always be blindly
applied, the truncation rule does not apply in the absence of
excess demand and its effect is modulated with the level of
excess demand.
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Closing remarks
• Nevertheless, efficiency losses are significant.
• Impact on long term competitivity of the Quebec egg production
sector?
• However, it represents a sizeable improvement over current
practices, where a large portion of the gains from trade are likely
captured by feed suppliers
• Efficiency loss should be seriously considered and weighted
against the perceived benefits of lower market prices before
implementing a truncated uniform price auction in the field.
• First real auction, based on our design was realized June 1st
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Questions ?
Maurice Doyon
Professor
Department of Agricultural Economics and Consumer
Science
Laval University
Email: [email protected]