Abstract

http://ssrn.com/abstract=1859327
 
 

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Optimality Versus Practicality in Market Design: A Comparison of Two Double Auctions


Mark Satterthwaite


Northwestern University - Kellogg School of Management

Steven R. Williams


University of Illinois at Urbana-Champaign - Department of Economics

Konstantinos E. Zachariadis


London School of Economics

March 12, 2013

Games and Economic Behavior, Vol. 86, 2014

Abstract:     
We consider a market for indivisible items with m buyers, each of whom wishes to buy at most one item, and m sellers, each of whom has one item to sell. The traders privately know their values/costs, which are statistically dependent. Two mechanisms for trading are considered. The buyer’s bid double auction collects bids and offers 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 by buyers. The designed mechanism is a revelation mechanism in which honest reporting of values/costs is incentive compatible and all gains from trade are achieved in equilibrium. 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.

Number of Pages in PDF File: 24

Keywords: C63, C72, D44, D47, D82

JEL Classification: double auction, designed mechanism, correlated values

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Date posted: June 7, 2011 ; Last revised: August 13, 2014

Suggested Citation

Satterthwaite, Mark and Williams, Steven R. and Zachariadis, Konstantinos E., Optimality Versus Practicality in Market Design: A Comparison of Two Double Auctions (March 12, 2013). Games and Economic Behavior, Vol. 86, 2014. Available at SSRN: http://ssrn.com/abstract=1859327 or http://dx.doi.org/10.2139/ssrn.1859327

Contact Information

Mark A. Satterthwaite
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Steven R. Williams
University of Illinois at Urbana-Champaign - Department of Economics ( email )
410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333-4516 (Phone)
Konstantinos E. Zachariadis (Contact Author)
London School of Economics ( email )
Houghton St
Department of Finance
London, WC2A 2AE
United Kingdom
+442079556541 (Phone)
+442078494647 (Fax)
HOME PAGE: http://www2.lse.ac.uk/finance/people/profiles/KostasZachariadis.aspx
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