Market power in bilateral oligopoly: Experimental evidence from emissions trading

Market power in emissions trading has been extensively investigated because emerging markets for tradableemissions permits such as the European Unions Emissions Trading Scheme can be dominated by relatively fewlarge sellers or buyers. A key feature of emissions trading markets is that emissions permits are often traded bya small number of large sellers and buyers. Thus, both sellers and buyers can influence the market pricein their favor, and emissions trading markets can be considered a bilateral oligopoly model in which everytrader can exercise market power. Using data from a laboratory experiment, we examine whether a bilateral oligopoly model is appropriate for predicting market outcomes of emissions trading. Our results suggest that theoretical bilateral oligopoly models, which assume market power of all traders, could better describe market outcomes of emissions trading. The effects of the slope of the marginal abatement cost function on market power in laboratory experiments are found to be consistent with those predicted by theoretical bilateral oligopoly models. In contrast with the previous studies, our results imply that the double auction is not able tosuppress market power in emissions trading.