Experimental Market Design and Methodology: The Alaska Gas Pipeline^*

We investigate the problem of constructing a gas pipeline that is to be shared initially by several incumbent firms. The paper concerns the first phase of a study of the use of alternative auction procedures for building and awarding capacity rights to a pipeline joint venture in accordance with individual bidders’ willingness to pay the initial fixed investment cost. Each participant is awarded a share of capacity equal to his share of the total bid amount if and only if his bid is accepted.

In this phase, we compare and contrast the performance of a traditional sealed bid auction with a clock auction in which an ascending clock quotes the bid price on each round and bidders simply indicate when they are no longer active as the clock ticks up. The auction results determine capacity on each leg of a pipeline that allows for a telescoped size on different legs. Later phases of the research plan deal with auctions (1) to transfer capacity among incumbent holders of initial rights or to new entrants willing to pay for it; (2) for capacity expansion; and (3) for complementary exploration lease rights to new gas. The latter auctions permit rights to explore and rights of pipeline access to be transferred in package combinations depending on the bids tendered. Combinatorial auctions have been successfully applied in industry to auction logistic services, and emission permits. Recently the methods have been extended to use clocks to greatly simplify combinatorial bidding.

This is the first study to compare the performance of a clock auction with alternative institutions; and is the first study of the clock auction in a unique joint venture sharing environment.

The paper emphasizes experimental methodology in a way that is rarely presented in experimental papers. We focus on the learning of the experimenter as we progress through a series of institutional rules. In our presentation, we convey the steps in our thinking, and how the results obtained at each step motivated the modifications in institutional detail, presentation, instructions, etc. , used in the next step.

The idea is to make transparent to the reader the purpose and learning from each exploration step. In fact, the story is self-contained in the sequence of charts as well as in reading the text. We critique the standard reporting style used by experimental economists, particularly as it is applied to new areas of investigation.

We emphasize the presentation and documentation of the experimental procedures and statistical analysis. This is a fundamentally different approach to the reporting and presentation of experimental studies that is commonly followed. More commonly discrepancies between theoretical expectations and observations are methodologically interpreted as theory failures. Herein protocol modification in the light of evidence where expectations are not met is part of learning from experiment to improve operating performance.