An Analysis on the Transaction Costs of Water Markets under DPA and UPA Auctions

The potential revenues of water right transactions can be substantial in theory, but the actual receipts are generally limited in practice. This difference is attributable to the presence of other factors influencing the operation of water markets. In this paper, we study the discriminatory-price and the uniform-price sealed-bid procurement auction for divisible items in water right trade wherein commissions define the costs of transactions. We further analyze the quantitative relationships between transaction costs and the revenues of sellers, buyers, and of the auction site. The findings indicate that transaction costs do not affect the margins of bidders because of reluctance to raise quotations. The bidders bear the commissions but impose the transaction costs outwardly on the seller who as a result suffers from reduced revenues. Of the two types the uniform-price auction generates more revenue for sellers than the discriminatory-price auction. Copyright Springer Science+Business Media Dordrecht 2013