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Rustichini, Aldo
Year of Publication: 
Series/Report no.: 
Discussion Paper No. 995
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). By comparison, inefficiency is 0(1/m) for a dual price mechanism and 0(1/m/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 noncooperative behavior of traders.
Document Type: 
Working Paper

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