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Keep it Down: An Experimental Test of the Truncated Uniform Price Auction

The introduction of a centralized institution for trading production rights in quota-regulated agricultural sectors can dramatically improve the flow of information among market pareticipants and increase efficiency. On the other hand, prevailing conditions in these small markets can provide sellers with a market advantage, yielding high quota prices that impose important financial costs on quota holders and limit the entry of new producers into the industry. In this paper, we modify the normal allocation rule of a uniform price auction (UPA) to favor buyers who bid low prices. In laboratory experiments, we test this “Truncated” Uniform Price Auction (T-UPA) against a regular Uniform Price Auction for its ability to decrease equilibrium prices, affect buyer and seller behavior and to assess how it impacts efficiency. The results show that the T-UPA significantly lowers the equilibrium price and results in moderate efficiency losses. Most importantly, the T-UPA effectively counters the market power of oligopolists when demand far outstrips supply.
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