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Market Trading Models

The model looks at the conditions needed for the emissions market to exist, whether the market settles to equilibrium and how many trades occur. It also tests the impact of changes in the market rules, comparing outcomes under a double auction with those achieved under bi-lateral trade.

A crucial finding of the model is that the greater the number of ways in which firms differ, the greater the number of trades which are carried out in the permits market. This implies that diversity amongst firms is an important factor in avoiding ‘thin’ markets in which little trade occurs.

In addition, the model also upholds the finding that double auction market mechanisms are more efficient than bi-lateral trading systems for achieving theoretical price equilibrium, as illustrated in the chart at left. This is relevant to considerations of how to allocate permits across incumbent industry participants prior to the establishment of a trading market.

Volterra trading models are adaptable to a wide range of industry and competitive scenarios, in order to provide insight into the potential shifts in market share and likely price dynamics as the market evolves. Volterra trading models can also be configured with different regulatory contexts, for example to reflect anti-trust rules, and can examine the impact of new entrants on monopolistic or oligopolistic incumbents.

 

By examining the process by which markets change and develop, Volterra trading models allow the potential effects of competitive strategies to be analysed. These include operational tactics such as changes to price, as well as more strategic options such as improvements in quality or innovations in the market mechanism itself.