Trade reduction vs. multi-stage: A comparison of double auction design approaches

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2006.04.015 Byline: Leon Yang Chu (a)(b), Zuo-Jun Max Shen (b) Keywords: Mechanism design; Double auction; Strategy-proof mechanism Abstract: With the growth of electronic markets, designing double auction mechanisms that are applicable to emerging market structures has become an important research topic. In this paper, we investigate two truthful double auction design approaches, the Trade Reduction Approach and the Multi-Stage Design Approach, and compare their resulting mechanisms in various exchange environments. We find that comparing with the Trade Reduction Approach, the Multi-Stage Design Approach offers mechanisms applicable to more complicated exchange environments. Furthermore, for the known trade reduction mechanisms, we prove that the corresponding mechanisms under the multi-stage design approach are superior in terms of both social efficiency and individual payoffs, in each exchange environment of interest. Our computational tests show that the mechanisms under the multi-stage design approach achieve very high efficiency in various scenarios. Author Affiliation: (a) Marshall School of Business, University of South California, Los Angeles, CA 90089, United States (b) Department of Industrial Engineering and Operations Research, University of California, Berkeley, CA 94720, United States Article History: Received 23 May 2005; Accepted 3 April 2006