Double Auctions, Competitive Equilibrium, and Price Discovery

Summary

The paper develops a theoretical account of why dynamic double auctions can move prices toward competitive equilibrium, a tendency previously documented in laboratory experiments. It studies a pure exchange economy in which agents submit bids based on indifference prices implied by their current holdings and preferences. This setup links an auction's evolving bids and allocations to the economic conditions that determine agents' willingness to trade.

The authors show that Walras equilibria correspond to fixed points of the double auction. They also establish that repeated auctions produce bounded sequences of prices and allocations, with cluster points that are Walras equilibria with transfers. These are theoretical results about the specified model and bidding behavior; the description does not report empirical tests, market data, or how robust the conclusions are to alternative bidding rules or market structures. For market participants, the work offers a framework for understanding price discovery in auctions, while leaving real-world applicability dependent on assumptions not detailed in the supplied text.

Key ideas

• The paper analyzes dynamic double auctions in a pure exchange economy.
• Agents bid at indifference prices determined by their holdings and preferences.
• Walras equilibria correspond to fixed points of the modeled double auction.
• Repeated auctions generate bounded price and allocation sequences whose cluster points are equilibria with transfers.
• The stated conclusions are theoretical and apply to the specified economic setup.

Tags

# Social welfare and price discovery in double auction markets


# Social welfare and price discovery in double auction markets









The tendency of the double auction mechanism to drive prices to competitive equilibrium has been well documented in laboratory experiments, but the phenomenon has lacked a theoretical explanation. This paper studies dynamic double auctions in a pure exchange economy where agents bid their indifference prices implied by their current holdings and preferences. We show that Walras equilibria coincide with the fixed points of the double auction and that repeated double auctions generate bounded sequences of allocations and prices whose cluster points are Walras equilibria with transfers.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.