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Convergence of outcomes and evolution of strategic behavior in double auctions

  • Shira Fano

    ()

    (Dept. of Applied Mathematics, University of Venice)

  • Marco Li Calzi

    ()

    (Dept. of Applied Mathematics and Advanced School of Economics, University of Venice)

  • Paolo Pellizzari

    ()

    (Dept. of Applied Mathematics and Advanced School of Economics, University of Venice)

We study the emergence of strategic behavior in double auctions with an equal number n of buyers and sellers, under the distinct assumptions that orders are cleared simultaneously or asynchronously. The evolution of strategic behavior is modeled as a learning process driven by a genetic algorithm. We find that, as the size n of the market grows, allocative inefficiency tends to zero and performance converges to the competitive outcome, regardless of the order-clearing rule. The main result concerns the evolution of strategic behavior. Under simultaneous order-clearing, as n increases, only marginal traders learn to be price takers and make offers equal to their valuations/costs. Under asynchronous order-clearing, as n increases, all intramarginal traders learn to be price makers and make offers equal to the competitive equilibrium price. The nature of the order-clearing rule affects in a fundamental way what kind of strategic behavior we should expect to emerge.

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File URL: http://virgo.unive.it/wpideas/storage/2010wp196.pdf
File Function: First version, 2010
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Paper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 196.

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Length: 27 pages
Date of creation: Feb 2010
Date of revision:
Publication status: Forthcoming in Journal of Evolutionary Economics
Handle: RePEc:vnm:wpaper:196
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  1. Roberto Cervone & Stefano Galavotti & Marco LiCalzi, 2009. "Symmetric Equilibria in Double Auctions with Markdown Buyers and Markup Sellers," Working Papers 187, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  2. Leininger, W. & Linhart, P. B. & Radner, R., 1989. "Equilibria of the sealed-bid mechanism for bargaining with incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 63-106, June.
  3. Rustichini, Aldo & Satterthwaite, Mark A & Williams, Steven R, 1994. "Convergence to Efficiency in a Simple Market with Incomplete Information," Econometrica, Econometric Society, vol. 62(5), pages 1041-63, September.
  4. Lettau, Martin, 1997. "Explaining the facts with adaptive agents: The case of mutual fund flows," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1117-1147, June.
  5. Mikhail Anufriev & Jasmina Arifovic & John Ledyard & Valentyn Panchenko, 2013. "Efficiency of continuous double auctions under individual evolutionary learning with full or limited information," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 539-573, July.
  6. Shira Fano & Marco Li Calzi & Paolo Pellizzari, 2010. "Convergence of outcomes and evolution of strategic behavior in double auctions," Working Papers 196, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  7. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. 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 119-37, February.
  9. Zhan, Wenjie & Friedman, Daniel, 2007. "Markups in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2984-3005, September.
  10. Dawid, Herbert, 1999. "On the convergence of genetic learning in a double auction market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1545-1567, September.
  11. Mendelson, Haim, 1985. "Random competitive exchange: Price distributions and gains from trade," Journal of Economic Theory, Elsevier, vol. 37(2), pages 254-280, December.
  12. Mark A. Satterthwaite & Steven R. Williams, 2002. "The Optimality of a Simple Market Mechanism," Econometrica, Econometric Society, vol. 70(5), pages 1841-1863, September.
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