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Bilateral trading in divisible double auctions

Author(s)
Du, Songzi; Zhu, Haoxiang
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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. Keywords: Divisible double auctions; Bilateral trading; Bargaining; Ex post equilibrium
Date issued
2016-11
URI
http://hdl.handle.net/1721.1/120777
Department
Sloan School of Management
Journal
Journal of Economic Theory
Publisher
Elsevier BV
Citation
Du, Songzi, and Haoxiang Zhu. “Bilateral Trading in Divisible Double Auctions.” Journal of Economic Theory 167 (January 2017): 285–311 © 2016 Elsevier Inc
Version: Author's final manuscript
ISSN
00220531

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