Double Auctions and Transaction Costs

Abstract

We show how transaction costs may fundamentally alter incentives and welfare in markets. We identify two categories of transaction costs. Uniform transaction costs --- such as fixed and price fees --- guarantee positive revenue and are asymptotically strategyproof, but incur unavoidable dead-weight loss. Discriminatory transaction costs --- such as spread fees --- can avoid dead-weight loss but lead to complex strategic behavior that depends on traders' beliefs, even in large markets. Depending on traders' beliefs, the outcomes range from positive revenue with no dead-weight loss to complete market failure.

Keywords: Transaction Costs, Double Auctions, Incentives, Efficiency, Robustness,

Market Design.

Keywords: Transaction Costs, Incentives, Efficiency, Robustness., Market Design, Double Auctions

JEL Classification: D23, D44, D47, G14