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

Satterthwaite, Mark, Williams, Steven R. and Zachariadis, Konstantinos (2014) Optimality versus practicality in market design: a comparison of two double auctions. Games and Economic Behavior, 86. pp. 248-263. ISSN 0899-8256

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Identification Number: 10.1016/j.geb.2014.03.014


We consider a market for indivisible items with m buyers and m sellers. Traders privately know their values/costs, which are statistically dependent. Two mechanisms are considered. The buyer's bid double auction collects bids and asks 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. The designed mechanism is a revelation mechanism in which honest reporting of values/costs is incentive compatible and all gains from trade are achieved. 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 the virtues of the simple yet mildly inefficient buyer's bid double auction to the flawed yet perfectly efficient designed mechanism.

Item Type: Article
Official URL:
Additional Information: © 2014 Elsevier Inc
Divisions: Finance
Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C0 - General > C00 - General
G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited: 13 May 2014 14:05
Last Modified: 12 Jun 2024 00:21

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