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Bilateral trading in divisible double auctions

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  • Du, Songzi
  • Zhu, Haoxiang

Abstract

Existing models of divisible double auctions typically require three or more traders—when there are two traders, the usual linear equilibria imply market breakdowns unless the traders' values are negatively correlated. This paper characterizes a family of nonlinear ex post equilibria in a divisible double auction with only two traders, who have interdependent values and submit demand schedules. The equilibrium trading volume is positive but less than the first best. Closed-form solutions are obtained in special cases. Moreover, no nonlinear ex post equilibria exist if: (i) there are n≥4 symmetric traders or (ii) there are 3 symmetric traders with pure private values. Overall, our nonlinear equilibria fill the “n=2” gap in the divisible-auction literature and could be a building block for analyzing strategic bilateral trading in decentralized markets.

Suggested Citation

  • Du, Songzi & Zhu, Haoxiang, 2017. "Bilateral trading in divisible double auctions," Journal of Economic Theory, Elsevier, vol. 167(C), pages 285-311.
    • Handle: RePEc:eee:jetheo:v:167:y:2017:i:c:p:285-311
    DOI: 10.1016/j.jet.2016.11.001
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    References listed on IDEAS

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    Cited by:

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    3. Liu, Yun & Tan, Bowen, 2021. "Consignment auctions revisited," Economics Letters, Elsevier, vol. 203(C).
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    5. Kang‐Soek Lee & Richard A. Werner, 2023. "Are lower interest rates really associated with higher growth? New empirical evidence on the interest rate thesis from 19 countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 3960-3975, October.
    6. Milena Wittwer, 2021. "Connecting Disconnected Financial Markets?," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 252-282, February.
    7. Heumann, Tibor, 2021. "Efficiency in trading markets with multi-dimensional signals," Journal of Economic Theory, Elsevier, vol. 191(C).

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    More about this item

    Keywords

    Divisible double auctions; Bilateral trading; Bargaining; Ex post equilibrium;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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