Convergence to Efficiency in a Simple Market with Incomplete Information
AbstractAn independent private values model of trade with m buyers and m sellers is considered in which a double auction sets price to equate revealed demand and supply. In a symmetric Bayesian Nash equilibrium, each trader acts not as a price-taker, but instead strategically misrepresents his true demand/supply to influence price in his favor. This causes inefficiency. We show that the amount by which a trader misreports is 0(1/m) and the corresponding inefficiency is 0(1/m^2). By comparison, inefficiency is 0(1/m) for a dual price mechanism and 0(1/m^1/2) for a fixed price mechanism. Price-taking behavior and its associated efficiency thus quickly emerge in the double auction despite the asymmetric information and the noncooperative behavior of traders.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 995.
Date of creation: May 1992
Date of revision:
Contact details of provider:
Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
Other versions of this item:
- Rustichini, Aldo & Satterthwaite, Mark A & Williams, Steven R, 1994. "Convergence to Efficiency in a Simple Market with Incomplete Information," Econometrica, Econometric Society, vol. 62(5), pages 1041-63, September.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McAfee, R. Preston., 1990.
"A Dominant Strategy Double Auction,"
734, California Institute of Technology, Division of the Humanities and Social Sciences.
- Wilson, Robert B, 1985. "Incentive Efficiency of Double Auctions," Econometrica, Econometric Society, vol. 53(5), pages 1101-15, September.
- Holmstrom, Bengt & Myerson, Roger B, 1983.
"Efficient and Durable Decision Rules with Incomplete Information,"
Econometric Society, vol. 51(6), pages 1799-819, November.
- Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Harsanyi, John C., 1994.
"Games with Incomplete Information,"
Nobel Prize in Economics documents
1994-1, Nobel Prize Committee.
- Aldo Rustichini, 1990. "Convergence to Price-Taking Behavior in a Simple Market," Discussion Papers 914, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Satterthwaite, Mark A & Williams, Steven R, 1989. "The Rate of Convergence to Efficiency in the Buyer's Bid Double Auction as the Market Becomes Large," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 477-98, October.
- McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
- Satterthwaite, Mark A. & Williams, Steven R., 1989. "Bilateral trade with the sealed bid k-double auction: Existence and efficiency," Journal of Economic Theory, Elsevier, vol. 48(1), pages 107-133, June.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker).
If references are entirely missing, you can add them using this form.