Optimality Versus Practicality in Market Design: A Comparison of Two Double Auctions
Northwestern University - Kellogg School of Management
Steven R. Williams
University of Illinois at Urbana-Champaign - Department of Economics
Konstantinos E. Zachariadis
School of Economics and Finance, Queen Mary University of London
March 12, 2013
Games and Economic Behavior, Vol. 86, 2014
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
Date posted: June 7, 2011 ; Last revised: November 9, 2015
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