Social welfare and price discovery in double auction markets

2026-10-01

AI Summary

This study provides a theoretical explanation for the convergence of double auction mechanisms toward competitive equilibrium, bridging the gap between laboratory observations and theoretical models. Focusing on dynamic double auctions in pure exchange economies, it constructs a bidding model based on indifference prices. By integrating general equilibrium theory, fixed-point theorems, and dynamical systems methods, the work analyzes agents' bidding behavior according to their current endowments and preferences. The core contribution lies in proving, for the first time, that Walrasian equilibrium constitutes a fixed point of the double auction mechanism. Furthermore, it rigorously demonstrates that allocation and price sequences are bounded, with all accumulation points converging to Walrasian equilibria with transfers. These results establish a formal theoretical foundation for price discovery within double auction mechanisms.

Abstract

The tendency of the double auction mechanism to drive prices to competitive equilibrium has been well documented in laboratory experiments, but the phenomenon has lacked a theoretical explanation. This paper studies dynamic double auctions in a pure exchange economy where agents bid their indifference prices implied by their current holdings and preferences. We show that Walras equilibria coincide with the fixed points of the double auction and that repeated double auctions generate bounded sequences of allocations and prices whose cluster points are Walras equilibria with transfers.

Problem

• double auction
• competitive equilibrium
• Walras equilibria
• price discovery
• social welfare

Innovation

• Double auction
• Walras equilibrium
• Price discovery
• Dynamic markets
• Fixed points