Convergence of outcomes and evolution of strategic behavior in double auctions
AbstractWe 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 InfoPaper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 196.
Length: 27 pages
Date of creation: Feb 2010
Date of revision:
Publication status: Forthcoming in Journal of Evolutionary Economics
Trading protocols; asymptotic equivalence; learning; genetic algorithms.;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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- 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.
- Ruijgrok, Matthijs, 2012. "A single-item continuous double auction game," MPRA Paper 42086, University Library of Munich, Germany.
- Florian Hauser & Marco LiCalzi, 2011. "Learning to trade in an unbalanced market," Working Papers 2, Department of Management, Università Ca' Foscari Venezia.
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