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A Matter of Equality: Linear Pricing in Combinatorial Exchanges

Author

Listed:
  • Martin Bichler

    (Department of Informatics, Technical University of Munich, 80333 Munich, Germany)

  • Vladimir Fux

    (Department of Informatics, Technical University of Munich, 80333 Munich, Germany)

  • Jacob Goeree

    (Department of Economics, University of New South Wales, Kensington, New South Wales 2052, Australia)

Abstract
Combinatorial exchanges that allow for package offers to address nonconvexities in demand or supply typically employ linear and anonymous prices because they are simple, tractable, and fair. Despite their prevalence, linear anonymous prices do not necessarily correspond to Walrasian competitive equilibrium prices in such settings, and their impact is not well understood. This paper is the first to analyze the effect of different pricing rules on the efficiency of combinatorial exchanges, using both analytic methods and numerical experiments. Our analysis is motivated by a combinatorial fishery-rights exchange designed to reform the fishing industry in New South Wales (NSW), Australia. We find that when linearity and anonymity are required for only one side of the market, the average efficiency loss is negligible. In contrast, with a single linear price vector for both sides, the efficiency loss is substantial, especially when the market is small. In a formal model, we show that efficiency losses decrease when the number of buyers grows or the size of the submitted packages decreases. Besides the reform of the NSW fishing industry, our results have important implications for other cap-and-trade programs as well as other industries where demand or cost complementarities play a role.

Suggested Citation

  • Martin Bichler & Vladimir Fux & Jacob Goeree, 2018. "A Matter of Equality: Linear Pricing in Combinatorial Exchanges," Information Systems Research, INFORMS, vol. 29(4), pages 1024-1043, December.
    • Handle: RePEc:inm:orisre:v:29:y:2018:i:4:p:1024-1043
    DOI: 10.1287/isre.2017.0766
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    Cited by:

    1. Mete Şeref Ahunbay & Martin Bichler & Johannes Knörr, 2024. "Challenges in Designing Electricity Spot Markets," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
    2. Ahunbay, Mete Şeref & Bichler, Martin & Dobos, Teodora & Knörr, Johannes, 2024. "Solving large-scale electricity market pricing problems in polynomial time," European Journal of Operational Research, Elsevier, vol. 318(2), pages 605-617.
    3. Martin Bichler & Johannes Knörr & Felipe Maldonado, 2023. "Pricing in Nonconvex Markets: How to Price Electricity in the Presence of Demand Response," Information Systems Research, INFORMS, vol. 34(2), pages 652-675, June.
    4. Jacob K Goeree, 2023. "Yquilibrium: A Theory for (Non-) Convex Economies," Papers 2305.06256, arXiv.org.
    5. Martin Bichler & Douglas Ferrell & Vladimir Fux & Jacob K. Goeree, 2019. "Designing Environmental Markets for Trading Catch Shares," Interfaces, INFORMS, vol. 49(5), pages 324-337, September.

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