Bargaining power in the Australian water market

Although the MDB water markets have been continuously evolving and maturing – and are considered the most advanced water market system in the world (particularly in the Southern Basin) – information transparency (asymmetric information) amongst participants remains an unsolved issue, which prevents efficient markets and causes social harm.
 
Concentration in water ownership may result in market power, and consequently anti-competitive behaviours (imperfect competition) in the water markets. ACCC (2020) also alleged that investors used their market power to influence water market prices to their advantage. Large investors have multiple advantages that include analytical resources, financial market access and financial backing, and are not constrained by the need to apply water for agricultural production; therefore, it has been alleged that investors restrict market supply sufficiently to artificially raise allocation prices by a material amount and then supply allocations to the market at inflated prices at times of peak demand (ACCC 2020). Although this has not been shown quantitatively in the Australian market, overseas research has shown that barriers in Chile water markets caused by information asymmetry led to different prices for homogeneous water rights (Hadjigeorgalis & Lilywhite 2004) and that even small market power in a groundwaterdependent agriculture region in southern California led to sizeable distributional impacts (Bruno & Sexton 2020).
 
The specific research question is: how buyer and seller characteristics influence the bargaining power in MDB water markets?
 
To answer these questions, following Harding et al (2003), the effects of bargaining power can be estimated by a hedonic pricing model where the dependent variable is the observed water price of a transaction and the independent variables include a vector of characteristics of water trades, vectors of differences and sums of seller and buyer attributes. Given the assumption of symmetric bargaining power (if buyers and sellers are identical then neither will have an advantage) and symmetric demand (buyers and sellers with identical characteristics place equal value on the traded good); the estimated coefficients of the vector of differences of seller and buyer characteristics provide direct measures of seller and buyer bargaining power associated with the specific characteristics.

The data are from state water registers (NSW, VIC and SA). Specific to each trade, attributes of both sellers and buyers are available such as water ownership types, water availability, and climate conditions.
 
Preliminary findings suggest that drought conditions, temperature, rainfall and water allocation percentage differences between the regions of sellers and buyers are associated with bargaining power in the temporary and permanent water markets in the southern Murray-Darling Basin. Different types of water ownership are found to have bargaining power in the market. For example, in the NSW temporary market, financial investors have the highest bargaining power, followed by irrigators, irrigation districts, industrial users, and the environment water holder and urban user with the lowest bargaining power. In the NSW permanent market, urban users have the highest bargaining power, followed by financial investors, irrigation districts, and irrigators, industrial users and the environmental holder with the lowest bargaining power.