Double Auctions and Transaction Costs
University of Zurich, Department of Economics, Working Paper No. 405
67 Pages Posted: 2 Apr 2022 Last revised: 31 May 2022
Date Written: February 11, 2022
Transaction costs are omnipresent in markets but are often omitted in economic models. We show that the presence of transaction costs can fundamentally alter incentive and welfare properties of Double Auctions, a canonical market organization. We further show that transaction costs can be categorized into two types. Double Auctions with homogeneous transaction costs---a category that includes fixed fees and price based fees---preserve the key advantages of Double Auctions without transaction costs: markets with homogeneous transaction costs are asymptotically strategyproof, and there is no efficiency-loss due to strategic behavior. In contrast, double auctions with heterogeneous transaction costs---such as spread fees---lead to complex strategic behavior (price guessing) and may result in severe market failures. Allowing for aggregate uncertainty, we extend these insights to market organizations other than Double Auctions.
Keywords: Double Auction, Transaction Costs, Incentives, Efficiency, Robustness.
JEL Classification: C72, D44, D47, D81, D82
Suggested Citation: Suggested Citation