Randomized Double Auctions: Gains from Trade, Trader Roles, and Price Discovery

Katerina Sherstyuk, Krit Phankitnirundorn () and Michael Roberts
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Krit Phankitnirundorn: University of Hawaii at Manoa, Department of Economics

No 202018, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially for individual traders who have little to gain under equilibrium pricing, leading to some redistribution of gains from high to low expected earners. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear not to obstruct and possibly enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re trading.

Keywords: economic experiments; double auction markets; gains from trade; speculation (search for similar items in EconPapers)
JEL-codes: C92 D02 D41 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-des, nep-exp and nep-mst
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Citations: View citations in EconPapers (2)

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Journal Article: Randomized double auctions: gains from trade, trader roles, and price discovery (2021)
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