The Double Auction Market

Institutions, Theories, And Evidence

Daniel Friedman, John Rust

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9780429972164
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

This book focuses on markets organized as double auctions in which both buyers and sellers can submit bids and asks for standardized units of well-defined commodities and securities. It examines evidence from the laboratory and computer simulations.

II. Theories

David Easley† and John O. Ledyard‡

† Cornell University, Ithaca, Ny 14853, and ‡ California Institute of Technology, Pasadena, Ca 91125

THREE

Theories of Price Formation and Exchange in Double Oral Auctions

We provide a theory to explain the data generated by experiments with double oral auctions. Our theory predicts convergence to the equilibrium implied by the law of demand and supply and provides an explanation of disequilibrium behavior. The predictions of our theory seem to fit the data better than do the predictions of Walrasian, Marshallian, or game theoretic models. Our theory also suggests that, in demand-supply environments, the double oral auction is remarkably robust in the sense that aggregate performance is similar for a very wide range of individual behaviors.

1. INTRODUCTION

One of the main justifications for the use of equilibrium models in economics is the argument that there are forces which tend to drive agents and their decisions towards an equilibrium if they are not at one already. Market equilibrium models have proven to be extremely powerful in the analysis of many situations; however, attempts to model and explain the forces that do drive an economy to equilibrium have met with little success. Most of the literature on the stability of equilibrium uses the fiction of a disinterested auctioneer who adjusts a single known price for each good in response to stated excess demand resulting from agents’ equilibrium plans. The limitations and defects of this approach are well known: for a survey of the literature, see Arrow and Hahn.¹ In addition, as far as we know, the only institutional arrangement that even approximates this idealized model of price formation is the London gold market (see Jarecki⁹).

Now, however, a body of data has been generated which provides detailed information on the disequilibrium behavior of traders in auction markets similar to those of organized commodity or stock exchanges. These data are difficult to ignore since they are generated experimentally under controlled conditions, and cannot be explained away by reference to measurement error, unobserved variables, or other fudge factors. In the experiment, a small number of traders, each with limited imperfect information, determine prices and quantities transacted through interactive bargains. There is neither a single price nor a single price quoter. Nonetheless, the quantities exchanged and the prices at which transactions take place typically conv...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• About the Santa Fe Institute
• Santa Fe Institute Editorial Board June 1991
• Santa Fe Institute Studies in the Sciences of Complexity
• Contributors to This Volume
• Table of Contents
• Preface
• Section I. Institutions
• Section II. Theories
• Section III. Evidence
• Index