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Optimality versus practicality in market design: a comparison of two double auctions

Satterthwaite, Mark, Williams, Steven R. and Zachariadis, Konstantinos (2011) Optimality versus practicality in market design: a comparison of two double auctions. . (Unpublished)

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Abstract

We consider a market for an indivisible good with m buyers, each of whom wishes to buy at most one item, and m sellers, each of whom has one item to sell. The traders privately know their values/costs, which are statistically dependent. Two mechanisms for trading are considered. The buyer's bid double auction collects bids and offers from traders and determines the allocation by selecting a market-clearing price. It fails to achieve all possible gains from trade because of strategic bidding by traders. The designed mechanism is a revelation mechanism in which honest reporting of values/costs is incentive compatible and all gains from trade are achieved in equilibrium. This optimality, however, comes at the expense of plausibility: (i) the monetary transfers among the traders are defined in terms of the traders' beliefs about each other's value/cost; (ii) a trader may suffer a loss ex post; (iii) the mechanism may run a surplus/deficit ex post. We compare here the virtues of the simple yet mildly inefficient buyer's bid double auction to the flawed yet perfectly efficient designed mechanism.

Item Type: Monograph (Working Paper)
Official URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id...
Additional Information: © 2011 The authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C0 - General > C00 - General
G - Financial Economics > G1 - General Financial Markets > G10 - General
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 16 Apr 2012 09:06
URL: http://eprints.lse.ac.uk/43079/

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