Optimality versus practicality in market design: A comparison of two double auctions

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

Games and Economic Behavior, 2014, vol. 86, issue C, 248-263

Abstract: We consider a market for indivisible items with m buyers and m sellers. Traders privately know their values/costs, which are statistically dependent. Two mechanisms are considered. The buyer's bid double auction collects bids and asks from traders and determines the allocation by selecting a market-clearing price. It fails to achieve all possible gains from trade because of strategic bidding. The designed mechanism is a revelation mechanism in which honest reporting of values/costs is incentive compatible and all gains from trade are achieved. This optimality, however, comes at the expense of plausibility: (i) the monetary transfers among the traders are defined in terms of the traders' beliefs about each other's value/cost; (ii) a trader may suffer a loss ex post; (iii) the mechanism may run a surplus/deficit ex post. We compare the virtues of the simple yet mildly inefficient buyer's bid double auction to the flawed yet perfectly efficient designed mechanism.

Keywords: Double auction; Designed mechanism; Correlated values (search for similar items in EconPapers)
JEL-codes: C63 C72 D44 D82 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:86:y:2014:i:c:p:248-263

DOI: 10.1016/j.geb.2014.03.014

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