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

24 Pages Posted: 7 Jun 2011 Last revised: 9 Nov 2015

Mark Satterthwaite

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

Date Written: March 12, 2013

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.

Keywords: C63, C72, D44, D47, D82

JEL Classification: double auction, designed mechanism, correlated values

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: https://ssrn.com/abstract=1859327 or http://dx.doi.org/10.2139/ssrn.1859327

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)

School of Economics and Finance, Queen Mary University of London ( email )

Graduate Centre
Mile End Campus
London, E1 4NS
United Kingdom
+44 20 7882 8698 (Phone)

HOME PAGE: http://www.konstantinosezachariadis.com

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