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Excess Demand, Market Power and Price Adjustment in Clearinghouse Auction Markets for Water

Author

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  • Oczkowski, Edward

    (School of Commerce, Charles Sturt University)

Abstract
This paper examines price variations in Northern Victorian (Australia) ‘clearinghouse’ auction markets for temporary water entitlements. The analysis assesses the role that the excess demand of unsatisfied bids and the market power of large volume bids, have on price variations. For four seasons (2002/3 to 05/6) and trading in the Greater Goulburn zone, results indicate that the excess demand of unsatisfied bids does significantly explain price variations, with elasticities ranging from 0.12 to 0.19. This relationship appears to be a result of the natural equilibrating nature of clearinghouse markets, rather than prices adjusting to previous levels of excess demand. Strategically, this implies that it is the accurate anticipation of demand and supply changes which is likely to be of most benefit to market traders. Market power is also illustrated to potentially impact on price variations, however, its impact appears to have been diminished in more recent seasons. Results suggest that large average demand bids (compared to average supply bids) negatively impact on prices with elasticities from -0.04 to -0.12. These results suggest that large demanders have demonstrated their ability to time their market bids to reap the rewards of lower market prices.

Suggested Citation

  • Oczkowski, Edward, 2008. "Excess Demand, Market Power and Price Adjustment in Clearinghouse Auction Markets for Water," Economic Analysis and Policy, Elsevier, vol. 38(2), pages 261-276, September.
    • Handle: RePEc:eee:ecanpo:v:38:y:2008:i:2:p:261-276
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    More about this item

    Keywords

    water prices; excess demand; auction markets;
    All these keywords.

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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