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Convergence to Efficiency in a Simple Market with Incomplete Information, Econometrica

Abstract

An independent private values model of trade with m buyers and m sellers is considered in which a double auction sets price to equate revealed demand and supply. In a symmetric Bayesian Nash equilibrium, each trader acts not as a price-taker, but instead strategically misrepresents his true demand/supply to influence price in his favor. This causes inefficiency. We show that the amount by which a trader misreports is 0(1/m) and the corresponding inefficiency is 0(1/m^2). By comparison, inefficiency is 0(1/m) for a dual price mechanism and 0(1/m^1/2) for a fixed price mechanism. Price-taking behavior and its associated efficiency thus quickly emerge in the double auction despite the asymmetric information and the non-cooperative behavior of traders.

Type

Article

Author(s)

Aldo Rustichini, Mark Satterthwaite, Steven R. Williams

Date Published

1994

Citations

Rustichini, Aldo, Mark Satterthwaite, and Steven R. Williams. 1994. Convergence to Efficiency in a Simple Market with Incomplete Information. Econometrica. 62(5): 1041-1063.

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