Price Formation in Double Auctions

Steven Gjerstad () and John Dickhaut

Microeconomics from University Library of Munich, Germany

Abstract: We develop a model of information processing and strategy choice for participants in a double auction. Sellers in this model form beliefs that an offer will be accepted by some buyer. Similarly, buyers form beliefs that a bid will be accepted. These beliefs are formed on the basis of observed market data, including frequencies of asks, bids, accepted asks, and accepted bids. Then traders choose an action that maximizes their own expected surplus. The trading activity resulting from these beliefs and strategies is sufficient to achieve transaction prices at competitive equilibrium and complete market efficiency after several periods of trading.

Keywords: Double auction; bounded rationality; experimental economics (search for similar items in EconPapers)
JEL-codes: C9 D41 D44 D8 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-02-04
New Economics Papers: this item is included in nep-ind, nep-pke and nep-rmg
Note: Type of Document - PDF; prepared on IBM PC - MikTeX; to print on HP/PostScript; pages: 32 ; figures: included. Published in Games and Economic Behavior
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Related works:
Journal Article: Price Formation in Double Auctions (1998)
Working Paper: Price Formation in Double Auctions (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpmi:0302001

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