Designing a Real Time Computer Assisted Auction for Natural Gas Networks

In technologically interdependent economic systems inefficiencies can easily arise from allocations contrived through independent bilateral negotiations. We can challenge this problem with the ‘smart market’: a coordination center applies optimization algorithms to private bids and offers submitted by decentralized agents to compute prices and allocations. This paper presents the laboratory development of a market institution for trading natural gas in a pipeline network. The institution has evolved over the past five years through thousands of hours of cash-motivated subject participation, professional analysis and continuous repro- gramming. It is not a trivial matter to engineer the most efficient market possible when subtle nuances in institutional rules can affect outcomes. Yet doing so in the laboratory is much less costly than a potentially failed field experiment.