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Convergence of outcomes and evolution of strategic behavior in double auctions

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Author Info

  • Shira Fano

    () (Dept. of Applied Mathematics, University of Venice)

  • Marco Li Calzi

    () (Dept. of Applied Mathematics and Advanced School of Economics, University of Venice)

  • Paolo Pellizzari

    () (Dept. of Applied Mathematics and Advanced School of Economics, University of Venice)

Abstract

We study the emergence of strategic behavior in double auctions with an equal number n of buyers and sellers, under the distinct assumptions that orders are cleared simultaneously or asynchronously. The evolution of strategic behavior is modeled as a learning process driven by a genetic algorithm. We find that, as the size n of the market grows, allocative inefficiency tends to zero and performance converges to the competitive outcome, regardless of the order-clearing rule. The main result concerns the evolution of strategic behavior. Under simultaneous order-clearing, as n increases, only marginal traders learn to be price takers and make offers equal to their valuations/costs. Under asynchronous order-clearing, as n increases, all intramarginal traders learn to be price makers and make offers equal to the competitive equilibrium price. The nature of the order-clearing rule affects in a fundamental way what kind of strategic behavior we should expect to emerge.

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Bibliographic Info

Paper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 196.

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Length: 27 pages
Date of creation: Feb 2010
Date of revision:
Publication status: Forthcoming in Journal of Evolutionary Economics
Handle: RePEc:vnm:wpaper:196

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For corrections or technical questions regarding this item, or to correct its listing, contact: (Marco LiCalzi).

Related research

Keywords: Trading protocols; asymptotic equivalence; learning; genetic algorithms.;

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Cited by:
  1. Florian Hauser & Marco LiCalzi, 2011. "Learning to trade in an unbalanced market," Working Papers 2, Department of Management, Università Ca' Foscari Venezia.
  2. Paolo Pellizzari, 2011. "Optimal trading in a limit order book using linear strategies," Working Papers 2011_16, Department of Economics, University of Venice "Ca' Foscari", revised Sep 2011.

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