Optimality versus practicality in market design: A comparison of two double auctions |
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| Institution: | 1. Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208, United States;2. Department of Economics, University of Illinois, 1407 W. Gregory Dr., Urbana, IL 61801-3606, United States;3. Department of Finance, London School of Economics, Houghton St., London WC2A 2AE, United Kingdom;1. Lancaster University Management School, UK;2. Athens University of Economics and Business, Greece;3. London School of Economics, Systemic Risk Centre, UK;4. National Technical University of Athens, School of Applied Mathematics and Physics, Greece;1. Center of Economic Research at ETH Zürich (CER-ETH), Switzerland;2. Department of Economics, Maastricht University, Netherlands;1. Guanghua School of Management, Peking University, Beijing, China;2. University of Pittsburgh, United States |
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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. |
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| Keywords: | Double auction Designed mechanism Correlated values |
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