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The Optimality of a Simple Market Mechanism

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  • Mark A. Satterthwaite
  • Steven R. Williams

Abstract

Strategic behavior in a finite market can cause inefficiency in the allocation, and market mechanisms differ in how successfully they limit this inefficiency. A method for ranking algorithms in computer science is adapted here to rank market mechanisms according to how quickly inefficiency diminishes as the size of the market increases. It is shown that trade at a single market-clearing price in the k-double auction is worst-case asymptotic optimal among all plausible mechanisms: evaluating mechanisms in their least favorable trading environments for each possible size of the market, the k-double auction is shown to force the worst-case inefficiency to zero at the fastest possible rate.

Suggested Citation

  • Mark A. Satterthwaite & Steven R. Williams, 1999. "The Optimality of a Simple Market Mechanism," Discussion Papers 1256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1256
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    References listed on IDEAS

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    1. Timothy N. Cason & Daniel Friedman, 1997. "Price Formation in Single Call Markets," Econometrica, Econometric Society, vol. 65(2), pages 311-346, March.
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    Cited by:

    1. Neeman, Zvika, 2003. "The effectiveness of English auctions," Games and Economic Behavior, Elsevier, vol. 43(2), pages 214-238, May.
    2. Zacharias, Eleftherios & Williams, Steven R., 2001. "Ex Post Efficiency in the Buyer's Bid Double Auction When Demand Can Be Arbitrarily Larger Than Supply," Journal of Economic Theory, Elsevier, vol. 97(1), pages 175-190, March.

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