Price discovery using a double auction

Mark A. Satterthwaite, Steven R. Williams, Konstantinos E. Zachariadis*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)57-83
Number of pages27
JournalGames and Economic Behavior
Volume131
DOIs
StatePublished - Jan 2022

Keywords

  • Allocational efficiency
  • Computation of equilibria
  • Double auction
  • Information aggregation
  • Rational expectations

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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