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A generalized trade reduction mechanism

Author

Listed:
  • Jacob Ehrlich

    (Air Force Global Strike Command)

  • Maximilian Moll

    (Universität der Bundeswehr)

  • Stefan Pickl

    (Universität der Bundeswehr)

Abstract

Double auction mechanism design centers on four properties: individual rationality (IR), incentive compatibility (IC), ideal efficiency, and budget balance (BB). The Myerson-Satterthwaite impossibility theorem prohibits satisfying all four properties simultaneously, but McAfee’s Trade Reduction Mechanism circumvents this by eliminating the least efficient trade. This article introduces a novel mechanism that optimizes the trade-off between efficiency and revenue in asymmetric markets. This control theoretic approach to mechanism design takes concepts drawn from George Leitmann’s adaptive stabilization strategies to adapt auction rules based on real-time feedback. The new mechanism proposed in this article generalizes trade reduction mechanisms through two key modifications: (1) the introduction of hyperparameters to establish distinct buyer and seller prices, ensuring positive revenue while maintaining efficiency, and (2) a "pre-filter" that detects inefficient traders, making the mechanism more resilient to market saturation. The resulting generalized trade reduction mechanism retains the economic properties of individual rationality, incentive compatibility, ideal efficiency, and budget balance.

Suggested Citation

  • Jacob Ehrlich & Maximilian Moll & Stefan Pickl, 2025. "A generalized trade reduction mechanism," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 33(2), pages 429-448, June.
    • Handle: RePEc:spr:cejnor:v:33:y:2025:i:2:d:10.1007_s10100-025-00969-w
    DOI: 10.1007/s10100-025-00969-w
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    References listed on IDEAS

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    1. Baliga Sandeep & Vohra Rakesh, 2003. "Market Research and Market Design," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-27, August.
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    9. Simon Loertscher & Leslie M. Marx & Tom Wilkening, 2015. "A Long Way Coming: Designing Centralized Markets with Privately Informed Buyers and Sellers," Journal of Economic Literature, American Economic Association, vol. 53(4), pages 857-897, December.
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    Cited by:

    1. Gustav Feichtinger & Christophe Deissenberg & Ulrike Leopold-Wildburger, 2025. "George Leitmann’s 100th birthday," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 33(2), pages 333-344, June.

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