Stochastic Stability In A Double Auction

Murali Agastya

No 5, Working Papers from University of Sydney, School of Economics

Abstract: In a k-double auction, a buyer and a seller must simultaneously announce a bid and an ask price respectively. Exchange of the indivisible good takes place if and only if the bid is at least as high as the ask, the trading price being the bid price with probability k and the ask price with probability (1 - k). We show that the stable equilibria of a complete information k-double approximate an asymmetric Nash Bargaining solution with the seller's bargaining power decreasing in k. Note that ceteras paribus, the payoffs of the seller of the one-shot game increase in k. Nevertheless, as the stochastically stable equilibrium price decreases in k, choosing the seller's favourite price with a relatively higher probability in individual encounters makes him worse off in the long run.

Keywords: k-double auction; multiple equilibria; risk potential; stochastic stability; Nash Bargaining Solution (search for similar items in EconPapers)
Date: 2003-05
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http://hdl.handle.net/2123/7652

Related works:
Journal Article: Stochastic stability in a double auction (2004)
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