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Bilateral trading in divisible double auctions

Listed author(s):
  • Du, Songzi
  • Zhu, Haoxiang

Existing models of divisible double auctions typically require three or more traders—when there are two traders, the usual linear equilibria imply market breakdowns unless the traders' values are negatively correlated. This paper characterizes a family of nonlinear ex post equilibria in a divisible double auction with only two traders, who have interdependent values and submit demand schedules. The equilibrium trading volume is positive but less than the first best. Closed-form solutions are obtained in special cases. Moreover, no nonlinear ex post equilibria exist if: (i) there are n≥4 symmetric traders or (ii) there are 3 symmetric traders with pure private values. Overall, our nonlinear equilibria fill the “n=2” gap in the divisible-auction literature and could be a building block for analyzing strategic bilateral trading in decentralized markets.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053116301028
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 167 (2017)
Issue (Month): C ()
Pages: 285-311

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Handle: RePEc:eee:jetheo:v:167:y:2017:i:c:p:285-311
DOI: 10.1016/j.jet.2016.11.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
  2. Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2014. "Information percolation in segmented markets," Journal of Economic Theory, Elsevier, vol. 153(C), pages 1-32.
  3. 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.
  4. Dimitri Vayanos, 1999. "Strategic Trading and Welfare in a Dynamic Market," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 219-254.
  5. Darrell Duffie, 2012. "Over-The-Counter Markets," Introductory Chapters,in: Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets Princeton University Press.
  6. Robert Shimer & Iván Werning, 2015. "Efficiency and Information Transmission in Bilateral Trading," NBER Working Papers 21495, National Bureau of Economic Research, Inc.
  7. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  8. Marzena Rostek & Marek Weretka, 2012. "Price Inference in Small Markets," Econometrica, Econometric Society, vol. 80(2), pages 687-711, 03.
  9. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
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