Price discovery using a double auction
We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated signals and either private or interdependent values. Using a combination of theorems and numer- ical experiments, we demonstrate that simple equilibria exist even in small markets. Moreover, we bound traders' strategic behavior as a function of market size and derive rates of convergence to zero of (i) ineciency in the allocation caused by strategic behavior and (ii) the error in the marketpriceasanestimateoftherationalexpectationsprice. Theseratestogetherwithnumerical experiments suggest that strategic behavior is inconsequential even in small markets in its e↵ect on allocational eciency and information aggregation. The BBDA thus simultaneously accomplishes both the informational and allocational goals that markets ideally fulfill; it does this perfectly in large markets and approximately in small markets, with the error attributable mainly to the small- ness itself and not the strategic behavior of traders.