Price discovery using a double auction

Mark A. Satterthwaite, Steven R. Williams and Konstantinos Zachariadis

Games and Economic Behavior, 2022, vol. 131, issue C, 57-83

Abstract: We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated private values/costs. Using a combination of theorems and computed examples, we demonstrate that simple equilibria exist even in small markets. Moreover, we bound traders' strategic behavior as a function of market size and derive rates of convergence to zero of (i) inefficiency in the allocation caused by strategic behavior and (ii) the error in the market price as an estimate of the rational expectations price. These rates together with computed examples suggest that strategic behavior can be inconsequential even in small markets in its effect on allocational efficiency and information aggregation. The BBDA thus simultaneously accomplishes both the informational and allocational goals that markets ideally fulfill; it does this perfectly in large markets and approximately in small markets, with the error due mainly to the smallness itself and not the strategic behavior of traders.

Keywords: Double auction; Rational expectations; Allocational efficiency; Information aggregation; Computation of equilibria (search for similar items in EconPapers)
JEL-codes: C62 C63 C72 D44 D82 D83 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:131:y:2022:i:c:p:57-83

DOI: 10.1016/j.geb.2021.11.001

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