Price Discovery Using a Double Auction
This talk investigates equilibrium in the buyer's bid double auction (BBDA) in a model
with correlated signals and either private or interdependent values. Using a combination
of theorems and numerical experiments, Satterthwaite will demonstrate that simple
equilibria exist even in small markets. Moreover, he bound traders' strategic behavior
as a function of market size and derive rates of convergence to zero of (i) inefficiency
in the allocation caused by strategic behavior and (ii) the error in the market price
as an estimate of the rational expectations price. These rates together with numerical
experiments suggest that strategic behavior is inconsequential even in small markets
in its effect on allocational efficiency and information aggregation. The BBDA thus
simultaneously accomplishes both the informational and allocational goals that markets
ideally fulfill; it does this perfectly in large markets and approximately in small
markets, with the error attributable mainly to the smallness itself and not the strategic
behavior of traders.
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