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European Review of Agriculture Economics Vol 30 (2) (2003) pp.193-215
© 2003 Oxford University Press and the Foundation for the European Review of Agricultural Economics

The single-bid restriction on milk quota exchanges

Peter Bogetoft, Kurt Nielsen and Henrik Ballebye Olesen

The Royal Veterinary and Agricultural University, Frederiksberg, Denmark

Summary

On the Danish milk quota exchange each producer can submit a single bid (a quantity and a price limit) only. We demonstrate that this restriction has several distorting effects. First, traders minimise the risk of foregoing profitable trade by submitting their average valuation rather than their marginal valuation of quota. Second, single bids cannot express full demand and supply curves. Therefore, not only the trade volume but also the allocation of quota may be sub-optimal. We evaluate the empirical importance of a single-bid restriction using data from the (multiple-bid) Ontario exchange. The misallocations identified are surprisingly low. This may be due to the character of milk production and the discrete nature of capacity adjustments.

Keywords: auction design, two-sided private value auction, multiple-bid exchange, bidding strategy, Danish quota exchange


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