Individual Rationality and Collective Rationality in Double Auction

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Individual Rationality and Collective Rationality in Double Auction

Introduction

1. Introduction of Double Auction

As one of the most popular way to trade, auction has a long history. According to the different kinds of market structure, there are two kinds of auction, one-side auction and two-side auction (i.e. double auction). Compared with one-side auction, the market structure of the double auction is many-to-many, which means that there are more than one seller and more than one buyer, so both the buyers and sellers lose their own comparative advantage which exists in one-side auction. The relationship between them is a kind of equality between demand and supply.

In recent years, with the development of the global economy, there are more challenges for new auction theory and its applications, which are shown in the following aspects. First, with the development of the Internet and communication technologies, e-commerce has become a new business method. At the same time, internet auction has been widely used in the field of e-commerce. Since auction is widely used in the field of trading non-scarcity goods, it changes structure of auction, which used to be based on the buyer’s market or the seller’s market. As double auction can solve the problem of collusion and malignant bid, it has become a widely used way in e-commerce. For example, both NYSE and Chicago Exchange have put different kinds of double auction into practice. With the growing of financial market and e-commerce, the need for better auction rules is surely increasing. Besides, as enterprise restructuring has become a hot topic, double auction is found to be a way to deal with property transactions, mergers and acquisitions. What’s more, with the upgrade of demand structure, the diversification strategy for enterprise business and influence of the supply chain management, there are diversified production, diversified manufacturing and diversified demand. Many famous car companies such as Ford are using combinatorial double auction to the sale and purchase of auto parts. When auction is used in the above fields with various needs, there is a great need for the development of new auction model.

Compared with other auction mechanisms, double auction can not only solve the problem of monopoly, but also reduce the duration and costs of trade. However, there are still some problems about it, such as trading rules, the way to release information and the formation of transaction price.

According to the above reasons, double auction has attracted much attention. And the core theories about it are Smith’s mystery and Hayek problem, which try to explain how the double auction can reach the equilibrium price and equilibrium quantity predicted by the demand-supply model, under the conditions that there is no complete information and few people in the auction.

2. Design of Experiment

In order to do some further analysis, we conducted an experiment which simplified real double auction situations with the help of several undergraduate students under four assumptions:

First, rational man assumption, which means everyone wants to maximize his/her profit. Second, the goods are homogeneous, so there is no monopoly.
Third, there is no cost of sending or getting information, i.e. the transaction cost is zero. Fourth, the participants have no information about the experiment parameter (the value for buyer or cost for seller) before they join the experiment.

(1). Design of market parameter
Parameter of the double auction market |
The value for buyer| The cost for seller|
buyer| The first unit| The second unit| seller| The first unit| The second unit| B1B2B3B4B5B6B7B8| 10.59.69.28.510.59.69.28.5| 5.96.87.38.05.96.88.07.3| S1S2S3S4S5S6S7S8| 5.66.06.47.15.66.06.47.1| 9.69.08.27.79.09.67.78.2| There are 8 people, and everyone has two units of goods. Each good has different value and cost.

(2) Trading rules
a. When the trade...
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