Experimental Market Design and Methodology: The Alaska Gas Pipeline

6 Experimental environments

There are two aspects of the experimental environment, the configuration of the pipeline options and the valuations the firms have for pipeline capacity.

The pipeline has two possible capacity sizes : small and Large. The small pipeline has 20 units capacity and e$800 total construction cost (average cost per unit capacity = e$40). The large capacity pipeline has 40 units capacity and e$1200 total construction cost (average cost per unit capacity = e$30). e$ is the experimental currency (unit of exchange). Each subject is assigned a conversion rate from e$ to US dollars. This facilitates the selection of conversion rates that approximately equalize the subjects’ payments under the optimal allocation.

6.1 Pipeline configurations

Single pipeline segment (SP)

This is essentially a baseline training and orientation exercise for both the experimenters and the subjects. See Figure 4.

Three leg network (YP)

Three pipeline segments A, B, and C with two possible paths AB or AC. This is a more realistic representation of one of the proposed Alaska pipeline routes using a combinatorial auction to determine the size and assignment of individual shares to each leg depending on their service needs. For example, the three legs could be A (North Slope), B (Anchorage) and C (Alberta/Chicago). See Figure 5G

6.2 Demand configurations

The experimental environment consists of six subjects each playing the role of a firm requesting pipeline capacity rights. There is one large size firm, two medium size firms, and three small size firms (all have two-step demands). Size is defined by the firms demand for capacity rights.

SP1 :

Single pipeline segment, the large capacity pipeline gives maximum surplus/welfare, each firm has the same valuation for the large and small pipeline. At the optimal allocation all firms receive value, see Figure 6.

SP2 :

Similar to SP1 except at the optimal allocation the small firms (4, 5, 6) receive value with a 50 percent probability, see Figure 7.

YP :

Path AC supplies the largest surplus. The large and medium size firms prefer Path AC, the small firms prefer path AB. Values for AC \(= (650, 550, 107=(0.66*160 + 0.34*0))\) and values for AB \(= (485, 225, 200)\) see Figures 8 and 9.