Fixed-Price Approximations to Optimal Efficiency in Bilateral Trade

50 Pages Posted: 7 Oct 2019

See all articles by Zi Yang Kang

Zi Yang Kang

Stanford University

Jan Vondrák

Stanford University

Date Written: September 22, 2019

Abstract

This paper studies fixed-price mechanisms in bilateral trade with ex ante symmetric agents. We show that the optimal price is particularly simple: it is exactly equal to the mean of the agents' distribution. The optimal price guarantees a worst-case performance of at least 1/2 of the first-best gains from trade, regardless of the agents' distribution. We also show that the worst-case performance improves as the number of agents increases, and is robust to various extensions. Our results offer an explanation for the widespread use of fixed-price mechanisms for size discovery, such as in workup mechanisms and dark pools.

Keywords: fixed-price mechanisms, bilateral trade, robustness, Myerson-Sattherthwaite

JEL Classification: D47, D82

Suggested Citation

Kang, Zi Yang and Vondrák, Jan, Fixed-Price Approximations to Optimal Efficiency in Bilateral Trade (September 22, 2019). Available at SSRN: https://ssrn.com/abstract=3460336 or http://dx.doi.org/10.2139/ssrn.3460336

Zi Yang Kang (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Jan Vondrák

Stanford University ( email )

Stanford, CA 94305
United States

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