Zero‐intelligence versus human agents: An experimental analysis of the efficiency of Double Auctions and Over‐the‐Counter markets of varying sizes

Abstract

We study two well‐known electronic markets: an over‐the‐counter (OTC) market, in which each trader looks for the best counterpart through bilateral negotiations, and a double auction (DA) market, in which traders post their quotes publicly. We focus on the DA–OTC efficiency gap and show how it varies with different market sizes (10, 20, 40, and 80 traders). We compare experimental results from a sample of 6400 undergraduate students in Economics and Management with zero‐intelligence agent‐based simulations. Simulation results show that the traded quantity increases with market size under both DA and OTC. Experimental results confirm the same tendency under DA, while the share of periods in which the traded quantity is lower than the efficient one increases with market size under OTC, ultimately leading to a DA–OTC efficiency gap increasing with the market size. We rationalize these results by putting forward a simple model of OTC market as a repeated bargaining procedure under incomplete information on buyers' valuations and sellers' costs. We show that efficiency decreases slightly with size due to two counteracting effects: acceptance rates in earlier interactions decrease with size, and earlier offers increase, but not always enough to compensate for the decrease in acceptance rates.

Controlling monopoly power in a double‐auction market experiment

“…In this paper we analyze different market structures with few sellers and many buyers, under the same trading institution: double auction. First of all, we strengthen previous experimental evidence showing that doubleauction trading mechanisms can recreate perfectly competitive environments (Smith andWilliams [1989, 1981], Davis and Williams [1991], Attanasi et al [2020]). Indeed, prices prevailing in our perfectly competitive markets converge towards theoretically predicted equilibrium levels, despite the fact that the fraction of buyers in the market is six times as much the fraction of sellers.…”

“…In particular, Attanasi et al (2021) show that increasing the market size by four times (from 10 to 40 or from 20 to 80 traders) does not affect buyers' behavior under double auction. This especially applies to our market structures since, when moving from Monopoly to any of the other four market structures, the number of buyers (and sellers) increases by four times.…”

“…This way, the process of offer and counteroffer leads to mutually beneficial agreements distorted toward the first anchor. Attanasi et al (2016, 2021) show that this anchoring effect especially holds under double‐auction mechanisms within the same market structure—perfect competition—repeatedly played for at least three periods.…”

Introduction to the special issue on markets, policies, and economic design: Theory and experiments

“…The size question has been of much interest in public good problems but to the best of our knowledge, has not been well‐explored in the context of over the counter (OTC) markets. In a multiperiod model, Attanasi et al (2021) using both simulation and experiments, address the question of the effects of market size on the efficiency of OTC markets in comparison to double auction markets (DA). Simulation results in both sorts of markets show that traded quantities increase with market size.…”

“…Attanasi et al (2021) address questions such as: How do alternative market organizations compare in terms of their efficiency? And what is the effect of market size?…”