Testing the boundaries of the double auction: The effects of complete information and market power

Abstract

We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1980), we test whether the wellknown equilibrating power of the double auction institution is robust to the presence of complete information about traders' values and costs and the presence of symmetric market power. We find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes.

Order book model with herd behavior exhibiting long-range memory

“…While there is a significant body of literature considering order book modeling [19][20][21][22][23][24][25][26]28], most of these models consider reproducing patterns observed at the order book level and usually neglect stylized facts related to the financial time series. It is worth to note that there are numerous papers in economics, which suggest that the prices in various auctions converge towards Walras equilibrium and that this convergence might be comparatively fast [52][53][54][55][56][57]. Yet this convergence is not instantaneous and we might observe some interesting effects in the high-frequency financial time series.…”

Competition with Indivisibilities and Few Traders

“…Our lab experiments involve the minimum number of traders using the double auction that we know of, which makes it a good robustness check for the properties of the double auction mechanism. Figure 8 compares the efficiency level in our double auction markets with a few double auction markets in previous studies (Smith et al, 1982;Smith, 1982;Smith and Williams, 1990;Kachelmeier and Shehata, 1992;Friedman and Ostroy, 1995;Kimbrough and Smyth, 2018). Double auction markets conducted in previous studies are mostly used for testing the robustness of the mechanism, so disturbances may have been introduced during the session, and different settings have been used in these studies.…”

Competition with indivisibilities and few traders

“…Our lab experiments involve the minimum number of traders using the double auction that we know of. Figure 9 compares the efficiency level in our double auction markets with a few double auction markets in previous studies (Smith et al 1982;Smith 1982;Smith and Williams 1990;Kachelmeier and Shehata 1992;Friedman and Ostroy 1995;Kimbrough and Smyth 2018). Double auction markets conducted in previous studies are mostly used for testing the robustness of the mechanism, so disturbances may have been introduced during the session, and different settings have been used in these studies.…”