Can Market Segmentation Improve the Performance of Water Quality Trading Auction? A Laboratory Experiment

This study addresses the problem of improving the performance of water quality trading auctions when information about delivery coefficients of nonpoint sources is revealed to potential sellers. We consider the case in which a regulator participating in an auction market as a buyer of water quality credits segments the market using information about the delivery coefficients of nonpoint sources participating as sellers and configurations representing the sellers’ set of cost distributions. We examine whether market segmentation can reduce sellers’ bid shading and improve market performance through a laboratory experiment and investigate the results’ robustness to configuration. Although the results show that market segmentation improves the performance of water quality trading auctions for a certain configuration, the impact on performance varies depending on the configuration