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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 1095-7235

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Abstract

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: http://www.journals.elsevier.com/journal-of-econom...
Additional Information: © 2014 Elsevier Inc
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
Research centres and groups > Financial Markets Group (FMG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 13 May 2014 14:05
URL: http://eprints.lse.ac.uk/46342/

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