Auction Experiments and Simulations of Milk Quota Exchanges
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Since 2000 Germany has introduced a fairly unique market mechanism to trade milk quotas
between dairy farms. The two major features are: (1) a quasi auctioning system that produces
excess demands which are covered by state reserves free of charge and (2) a price band that
is used to exclude highest bids. For both features an experimental design is developed to
study the impact in reference to a regular seller’s sealed bid double auction. Results show
that both treatments lead to significant misallocations. These are due to the direct impact of
regulations and due to an imperfect adjustment of bidding functions. The major goal of the
market design to reduce quota prices is reached, however, at significant trade losses.