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Stochastic Stability In A Double Auction

  • Agastya, Murali
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    In a k-double auction, a buyer and a seller must simultaneously announce a bid and an ask price respectively. Exchange of the indivisible good takes place if and only if the bid is at least as high as the ask, the trading price being the bid price with probability k and the ask price with probability (1 - k). We show that the stable equilibria of a complete information k-double approximate an asymmetric Nash Bargaining solution with the seller's bargaining power decreasing in k. Note that ceteras paribus, the payoffs of the seller of the one-shot game increase in k. Nevertheless, as the stochastically stable equilibrium price decreases in k, choosing the seller's favourite price with a relatively higher probability in individual encounters makes him worse off in the long run.

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    File URL: http://hdl.handle.net/2123/7652
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    Paper provided by University of Sydney, School of Economics in its series Working Papers with number 5.

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    Date of creation: May 2003
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    Handle: RePEc:syd:wpaper:2123/7652
    Contact details of provider: Postal: Sydney, NSW 2006
    Phone: 61 +2 9351 5055
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    Web page: http://sydney.edu.au/arts/economics
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    6. Morris, Stephen & Rob, Rafael & Shin, Hyun Song, 1995. "Dominance and Belief Potential," Econometrica, Econometric Society, vol. 63(1), pages 145-57, January.
    7. Ellingsen, Tore, 1995. "The Evolution of Bargaining Behavior," SSE/EFI Working Paper Series in Economics and Finance 61, Stockholm School of Economics.
    8. Bergin, James & Lipman, Barton L, 1996. "Evolution with State-Dependent Mutations," Econometrica, Econometric Society, vol. 64(4), pages 943-56, July.
    9. Atsushi Kajii & Stephen Morris, 1997. "The Robustness of Equilibria to Incomplete Information," Econometrica, Econometric Society, vol. 65(6), pages 1283-1310, November.
    10. Binmore, Ken & Samuelson, Larry, 1999. "Evolutionary Drift and Equilibrium Selection," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 363-93, April.
    11. Lawrence Blume, 1993. "The Statistical Mechanics of Best-Response Strategy Revision," Game Theory and Information 9307001, EconWPA, revised 26 Jan 1994.
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