Georg Rilinger, MIT Sloan School of Management
Few studies have explicitly recognized that market design is an organizational activity. Accordingly, there have been few efforts to explore the organizational reasons for market design failure. Based on archival material from three archives and thirty-six supplementary in- depth interviews, the paper identifies such reasons for a fatal design decision during the creation of California’s first electricity markets between 1993 and 2001. Designers proposed weak oversight structures even though their models called for active and permanent regulatory control. Sellers like Enron could therefore manipulate the market without fear of detection, prolonging the western energy crisis. A process of “positional abstraction” explains this mistake. Designers were split into three groups that worked in different divisions and relied on local frames to understand the oversight requirements. These frames represented different ways to imagine electricity markets from the perspective of different areas of expertise. Because they used the same mathematical models, but interpreted their practical implications differently, each group missed information the others were aware of and arrived at the conclusion that minimal oversight would suffice. Managers at higher levels of the hierarchy should have discovered and resolved these discrepancies. However, due to their position in the hierarchy, they considered the issue at a higher level of abstraction. Such ‘positional abstraction’ changed the definition of the problem and made room for ambiguities between answers that obscured the source of local disagreements. The paper contributes to theories of market design failure by showing how organizational factors can easily derail the high consistency requirements that confront efforts to design modern electricity markets.
