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Optimality versus practicality in market design: A comparison of two double auctions

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  • Satterthwaite, Mark A.
  • Williams, Steven R.
  • Zachariadis, Konstantinos E.

Abstract

We consider a market for indivisible items with m buyers and m sellers. Traders privately know their values/costs, which are statistically dependent. Two mechanisms are considered. The buyer's bid double auction collects bids and asks from traders and determines the allocation by selecting a market-clearing price. It fails to achieve all possible gains from trade because of strategic bidding. The designed mechanism is a revelation mechanism in which honest reporting of values/costs is incentive compatible and all gains from trade are achieved. This optimality, however, comes at the expense of plausibility: (i) the monetary transfers among the traders are defined in terms of the traders' beliefs about each other's value/cost; (ii) a trader may suffer a loss ex post; (iii) the mechanism may run a surplus/deficit ex post. We compare the virtues of the simple yet mildly inefficient buyer's bid double auction to the flawed yet perfectly efficient designed mechanism.

Suggested Citation

  • Satterthwaite, Mark A. & Williams, Steven R. & Zachariadis, Konstantinos E., 2014. "Optimality versus practicality in market design: A comparison of two double auctions," Games and Economic Behavior, Elsevier, vol. 86(C), pages 248-263.
  • Handle: RePEc:eee:gamebe:v:86:y:2014:i:c:p:248-263 DOI: 10.1016/j.geb.2014.03.014
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    References listed on IDEAS

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    Cited by:

    1. Eccles, Peter & Wenger, Nora, 2017. "Scalable games: modelling games of incomplete information," Bank of England working papers 641, Bank of England.

    More about this item

    Keywords

    Double auction; Designed mechanism; Correlated values;

    JEL classification:

    • 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
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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