On Equilibria of Bid-Ask Markets
Abstract
In this chapter we undertake an exploratory analysis of the connection between bilateral bargaining and the multilateral bargaining that is inherent in trading processes such as bid--ask markets. The purpose of this chapter, then, is to construct a proposed equilibrium for a model of an oral double auction. The model used is somewhat stylized; e.g., time is taken to be continuous. Moreover, the equilibrium has the special form derived in prior work by Cramton 1984 for the special case of one seller and one buyer; no attempt is made here to find other equilibria. Our main result characterizes the proposed equilibrium as a multilateral sequential bargaining process in which sellers and buyers are endogenously paired off to trade until the gains from trade are nearly exhausted. If there are many sellers and buyers then there is a small chance that a profitable trade will be missed, and if so the unrealized gains from trade are small. The price at which each pair trades is determined by the prospect of competition from other sellers and buyers. This feature differs from Cramton's characterization in which each trader's impatience to reach an agreement derives from an exogenously specified interest rate at which future payoffs are discounted.
Document Details
- Document Type
- Technical Report
- Publication Date
- Nov 01, 1984
- Accession Number
- ADA151299
Entities
People
- Robert Wilson
Organizations
- Stanford University