Bilateral Trading in Divisible Double Auctions
36 Pages Posted: 13 Jun 2016 Last revised: 7 Dec 2016
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: Suggested Citation