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Price Formation in Double Auctions

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  • Gjerstad, S.
  • Dickhaut, J.

Abstract

We develop a model of information processing and strategy choice for participants in a double auction. Sellers in this model form beliefs that an offer will be accepted by some buyer. Similarly, buyers form beliefs that a bid will be accepted. These beliefs are formed on the basis of observed market data, including frequencies of asks, bids, accepted asks, and accepted bids. Then traders choose an action that maximizes their own expected surplus. The trading activity resulting from these beliefs and strategies is sufficient to achieve transaction prices at competitive equilibrium and complete market efficiency after several periods of trading.
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Suggested Citation

  • Gjerstad, S. & Dickhaut, J., 1995. "Price Formation in Double Auctions," Papers 284, Minnesota - Center for Economic Research.
  • Handle: RePEc:fth:minner:284
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    References listed on IDEAS

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    1. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    2. Hurwicz, Leonid & Radner, Roy & Reiter, Stanley, 1975. "A Stochastic Decentralized Resource Allocation Process: Part I," Econometrica, Econometric Society, vol. 43(2), pages 187-221, March.
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    4. Gjerstad, Steven & Dickhaut, John, 1998. "Price Formation in Double Auctions," Games and Economic Behavior, Elsevier, vol. 22(1), pages 1-29, January.
    5. Cason, Timothy N. & Friedman, Daniel, 1996. "Price formation in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1307-1337, August.
    6. Robert B. Wilson, 1987. "On Equilibria of Bid-Ask Markets," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Arrow and the Ascent of Modern Economic Theory, chapter 11, pages 375-414, Palgrave Macmillan.
    7. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
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    More about this item

    Keywords

    PRICING; AUCTIONS;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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