Bilateral Trading in Divisible Double Auctions

36 Pages Posted: 13 Jun 2016 Last revised: 7 Dec 2016

See all articles by Songzi Du

Songzi Du

University of California, San Diego (UCSD) - Department of Economics

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: November 17, 2016

Abstract

Existing models of divisible double auctions typically require three or more traders -- when there are two traders, the usual linear equilibria imply market breakdowns unless the traders' values are negatively correlated. This paper characterizes a family of nonlinear ex post equilibria in a divisible double auction with only two traders, who have interdependent values and submit demand schedules. The equilibrium trading volume is positive but less than the first best. Closed-form solutions are obtained in special cases. Moreover, no nonlinear ex post equilibria exist if: (i) there are n>=4 symmetric traders or (ii) there are 3 symmetric traders with pure private values. Overall, our nonlinear equilibria fill the "n=2" gap in the divisible-auction literature and could be a building block for analyzing strategic bilateral trading in decentralized markets.

Keywords: divisible double auctions, bilateral trading, bargaining, ex post equilibrium

JEL Classification: D44, D82, G14

Suggested Citation

Du, Songzi and Zhu, Haoxiang, Bilateral Trading in Divisible Double Auctions (November 17, 2016). Journal of Economic Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2794813 or http://dx.doi.org/10.2139/ssrn.2794813

Songzi Du (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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