Hostname: page-component-7b9c58cd5d-dlb68 Total loading time: 0 Render date: 2025-03-16T10:22:40.610Z Has data issue: false hasContentIssue false
  • English
  • Français

Randomized double auctions: gains from trade, trader roles, and price discovery

Published online by Cambridge University Press:  14 March 2025

Katerina Sherstyuk Open the ORCID record for Katerina Sherstyuk [Opens in a new window] ,
Krit Phankitnirundorn  and
Michael J. Roberts
Katerina Sherstyuk*
Affiliation:
Department of Economics, University of Hawaii at Manoa, 2424 Maile Way, Honolulu, HI 96822, USA
Krit Phankitnirundorn*
Affiliation:
Department of Economics, University of Hawaii at Manoa, 2424 Maile Way, Honolulu, HI 96822, USA
Michael J. Roberts*
Affiliation:
Department of Economics and Sea Grant College Program, University of Hawaii at Manoa, 2424 Maile Way, Honolulu, HI 96822, USA
*
katyas@hawaii.edu
kritphan@hawaii.edu
mjrobert@hawaii.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially among those who have little to gain under equilibrium pricing. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation, leading to some redistribution of gains from high to low expected earners. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear to enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re-trading.

Keywords

Economic experimentsDouble auction marketsGains from tradeSpeculation

JEL classification

D41: Perfect Competition D02: Institutions: Design, Formation, Operations, and Impact C92: Laboratory, Group Behavior
Type
Original Paper
Information
Experimental Economics , Volume 24 , Issue 4 , December 2021 , pp. 1325 - 1364
Copyright
Copyright © 2021 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Supplementary Information The online version contains supplementary material available at https://doi.org/10.1007/s10683-021-09700-3.

References

Anderson, CM, & Sutinen, JG (2005). A laboratory assessment of tradable fishing allowances. Marine Resource Economics, 20(1), 1–23. 10.1086/mre.20.1.42629456CrossRefGoogle Scholar
Barrett, CB (2008). Smallholder market participation: Concepts and evidence from eastern and southern Africa. Food Policy, 33(4), 299–317. 10.1016/j.foodpol.2007.10.005CrossRefGoogle Scholar
Cason, TN, & Friedman, D (1996). Price formation in double auction markets. Journal of Economic Dynamics and Control, 20(8), 1307–1337. 10.1016/0165-1889(95)00901-9CrossRefGoogle Scholar
Cason, TN, & Gangadharan, L (2006). Emissions variability in tradable permit markets with imperfect enforcement and banking. Journal of Economic Behavior & Organization, 61(2), 199–216. 10.1016/j.jebo.2005.02.007CrossRefGoogle Scholar
Cason, TN, & Gangadharan, L (2013). Cooperation spillovers and price competition in experimental markets. Economic Inquiry, 51(3), 1715–1730. 10.1111/j.1465-7295.2012.00486.xCrossRefGoogle Scholar
Davis, DD, Harrison, GW, & Williams, AW (1993). Convergence to nonstationary competitive equilibria: an experimental analysis. Journal of Economic Behavior & Organization, 22(3), 305–326. 10.1016/0167-2681(93)90004-9CrossRefGoogle Scholar
Davis, DD, & Holt, CA (1993). Experimental economics, New Jersey: Princeton University Press 10.1515/9780691233376CrossRefGoogle Scholar
Deaton, A, & Laroque, G (1992). On the behaviour of commodity prices. The Review of Economic Studies, 59(1), 1–23. 10.2307/2297923CrossRefGoogle Scholar
Dickhaut, J, Lin, S, Porter, D, & Smith, V (2012). Commodity durability, trader specialization, and market performance. Proceedings of the National Academy of Sciences, 109(5), 1425–1430. 10.1073/pnas.1115742109CrossRefGoogle ScholarPubMed
Easley, D, Ledyard, JO Friedman, D, & Rust, J (1993). Theories of price formation and exchange in double oral auctions. The Double Auction Market. SFI Studies in the Sciences of Complexity, US: Addison-Wesley 63–97.Google Scholar
Edelman, B, Lee, HL, Mabiso, A, Pauw, K et al., (2015). Strengthening storage, credit, and food security linkages: The role and potential impact of warehouse receipt systems in malawi, International Food Policy Research Institute (IFPRI): Technical report.Google Scholar
Efron, B, & Tibshirani, RJ (1994). An introduction to the bootstrap, US: CRC Press 10.1201/9780429246593CrossRefGoogle Scholar
Fischbacher, U (2007). z-tree: Zurich toolbox for ready-made economic experiments. Experimental economics, 10(2), 171–178. 10.1007/s10683-006-9159-4CrossRefGoogle Scholar
Friedman, D (1984). On the efficiency of experimental double auction markets. The American Economic Review, 74(1), 60–72.Google Scholar
Friedman, D, & Ostroy, J (1995). Competitivity in auction markets: An experimental and theoretical investigation. The Economic Journal, 105(428), 22–53. 10.2307/2235318CrossRefGoogle Scholar
Gjerstad, SD, & Smith, VL (2014). Rethinking housing bubbles: The role of household and bank balance sheets in modeling economic cycles, England: Cambridge University Press 10.1017/CBO9780511979194CrossRefGoogle Scholar
Godby, R (2000). Market power and emissions trading: theory and laboratory results. Pacific Economic Review, 5(3), 349–363. 10.1111/1468-0106.00110CrossRefGoogle Scholar
Godby, RW, Mestelman, S, Muller, RA, & Welland, JD (1997). Emissions trading with shares and coupons when control over discharges is uncertain. Journal of environmental economics and management, 32(3), 359–381. 10.1006/jeem.1997.0977CrossRefGoogle Scholar
Gode, DK, & Sunder, S (1993). Allocative efficiency of markets with zero-intelligence traders: Market as a partial substitute for individual rationality. Journal of Political Economy, 101(1), 119–137. 10.1086/261868CrossRefGoogle Scholar
Gode, DK, & Sunder, S (1997). What makes markets allocationally efficient?. The Quarterly Journal of Economics, 112(2), 603–630. 10.1162/003355397555307CrossRefGoogle Scholar
Gondwe, A., & Baulch, B., et al. (2017). The case for structured markets in Malawi. MaSSP Policy Note 29. Washington, D.C.: International Food Policy Research Institute (IFPRI).Google Scholar
Greiner, B (2015). Subject pool recruitment procedures: organizing experiments with orsee. Journal of the Economic Science Association, 1(1), 114–125. 10.1007/s40881-015-0004-4CrossRefGoogle Scholar
Jamison, JC, & Plott, CR (1997). Costly offers and the equilibration properties of the multiple unit double auction under conditions of unpredictable shifts of demand and supply. Journal of Economic Behavior Organization, 32(4), 591–612. 10.1016/S0167-2681(97)00015-2CrossRefGoogle Scholar
Key, N, Sadoulet, E, & Janvry, AD (2000). Transactions costs and agricultural household supply response. American Journal of Agricultural Economics, 82(2), 245–259. 10.1111/0002-9092.00022CrossRefGoogle Scholar
Kotani, K, Tanaka, K, & Managi, S (2019). Which performs better under trader settings, double auction or uniform price auction?. Experimental Economics, 22(1), 247–267. 10.1007/s10683-018-9585-0CrossRefGoogle Scholar
Ledyard, JO, & Szakaly-Moore, K (1994). Designing organizations for trading pollution rights. Journal of Economic Behavior Organization, 25(2), 167–196. 10.1016/0167-2681(94)90009-4CrossRefGoogle Scholar
Lei, V, Noussair, CN, & Plott, CR (2001). Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs actual irrationality. Econometrica, 69(4), 831–859. 10.1111/1468-0262.00222CrossRefGoogle Scholar
Makowski, L, & Ostroy, JM (1987). Vickrey-clarke-groves mechanisms and perfect competition. Journal of Economic Theory, 42(2), 244–261. 10.1016/0022-0531(87)90087-1CrossRefGoogle Scholar
Miller, RM, Plott, CR, & Smith, VL (1977). Intertemporal competitive equilibrium: an empirical study of speculation. The Quarterly Journal of Economics, 91(4), 599–624. 10.2307/1885884CrossRefGoogle Scholar
Muller, RA, Mestelman, S, Spraggon, J, & Godby, R (2002). Can double auctions control monopoly and monopsony power in emissions trading markets?. Journal of Environmental Economics and Management, 44(1), 70–92. 10.1006/jeem.2001.1195CrossRefGoogle Scholar
Noussair, CN, Plott, CR, & Riezman, RG (1995). An experimental investigation of the patterns of international trade. The American Economic Review, 85(3), 462–491.Google Scholar
Noussair, CN, Plott, CR, & Riezman, RG (1997). The principles of exchange rate determination in an international finance experiment. Journal of Political Economy, 105(4), 329–368. 10.1086/262095CrossRefGoogle Scholar
Plott, C, Roy, N, & Tong, B (2013). Marshall and walras, disequilibrium trades and the dynamics of equilibration in the continuous double auction market. Journal of Economic Behavior & Organization, 94, 190–205. 10.1016/j.jebo.2012.12.002CrossRefGoogle Scholar
Plott, C., & Turocy, T. (1997). Intertemporal speculation under uncertain future demand: Experimental results. In Albers, W., Guth, W., Hammerstein, P., Moldovanu, B. Damme, E. van (Eds.), Understanding Strategic Interaction (pp. 475–493). Springer, Berlin, Heidelberg.Google Scholar
Plott, CR (1982). Industrial organization theory and experimental economics. Journal of Economic Literature, 20(4), 1485–1527.Google Scholar
Plott, C. R., & Agha, G. (1983). Intertemporal speculation with a random demand in an experimental market. In Tietz, (Ed.), Aspiration levels in bargaining and economic decision making. Lecture notes in economics and mathematical systems, No. 213 (pp. 201–216). Berlin: Springer-Verlag.Google Scholar
Singh, I., Squire, L., & Strauss, J. (1986). Agricultural household models: Extensions, applications, and policy. Number 11179. The World Bank.Google Scholar
Smith, VL (1962). An experimental study of competitive market behavior. Journal of Political Economy, 70(2), 111–137. 10.1086/258609CrossRefGoogle Scholar
Smith, VL (1965). Experimental auction markets and the walrasian hypothesis. Journal of Political Economy, 73(4), 387–393. 10.1086/259041CrossRefGoogle Scholar
Smith, V. L., Suchanek, G. L., & Williams, A. W. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5), 1119–1151.CrossRefGoogle Scholar
Smith, VL, & Williams, AW (1982). The effects of rent asymmetries in experimental auction markets. Journal of Economic Behavior & Organization, 3(1), 99–116. 10.1016/0167-2681(82)90006-3CrossRefGoogle Scholar
Taylor, JE, & Adelman, I (2003). Agricultural household models: genesis, evolution, and extensions. Review of Economics of the Household, 1(1–2), 33–58. 10.1023/A:1021847430758CrossRefGoogle Scholar
Williams, A. W., & Smith, V. L. (1984). Cyclical double-auction markets with and without speculators. Journal of Business, 57(1), 1–33.CrossRefGoogle Scholar
Supplementary material: File

Sherstyuk et al. supplementary material

Online Supplementary Materials S1: Experimental Instructions
Download Sherstyuk et al. supplementary material(File)
File 278.3 KB
Supplementary material: File

Sherstyuk et al. supplementary material

Online Supplementary Materials S2 and S3
Download Sherstyuk et al. supplementary material(File)
File 4.3 MB