Double Auctions and Transaction Costs

Transaction costs are ubiquitous in markets organized as double auctions. We classify these costs into two categories: discriminatory costs, like spread fees, and uniform costs, like price fees. Discriminatory costs lead to complex strategic behavior even in large markets, with outcomes ranging from positive revenue with no deadweight loss to complete market failure. Uniform costs are asymptotically strategyproof and guarantee positive revenue, but incur deadweight loss. Studying optimal design, we show that in the presence of possibly misspecified beliefs, uniform costs robustly achieve designer’s objectives while discriminatory costs do not. However, discriminatory costs might be advantageous in small market equilibria.