Truthful Double Auction Mechanisms

• Published in: Operations research Vol. 56; no. 1; pp. 102 - 120
• Main Authors: Chu, Leon Yang, Shen, Zuo-Jun Max
• Format: Journal Article
• Language: English
• Published: Linthicum, MD INFORMS 01.01.2008; Institute for Operations Research and the Management Sciences
• Subjects: Allocative efficiency; Analysis; analysis and design; Applied sciences; Auctions; Bid prices; bidding/auctions; Business to business commerce; Commodities; Decision theory. Utility theory; Economic aspects; Electronic commerce; Exact sciences and technology; games/group decisions; information systems; Linear programming; Mechanism design; Operational research and scientific management; Operational research. Management science; Optimal solutions; Portfolio theory; Shadow prices; Social welfare; Studies; Trade; Transaction costs; United States; Social decision; Buyers market; games/group decisions: bidding/auctions; Transaction cost; Bidding; Information system; analysis and design; Empirical method; Linear programming; Asymptotic approximation; information systems; Game theory
• ISSN: 0030-364X; 1526-5463
• DOI: 10.1287/opre.1070.0458

Following the multistage design approach, we propose two asymptotically efficient truthful double auction mechanisms, the BC-LP mechanism and the MBC mechanism, for an exchange market with many buyers and sellers. In this market, each buyer wants to procure a bundle of commodities and each seller supplies one unit of a commodity. Furthermore, various transaction-related costs will be incurred when a buyer trades with a seller. We prove that under both mechanisms, truthful bidding is a dominant strategy for all buyers and sellers when the buyers' bundle information and the transaction cost information are common knowledge. The BC-LP mechanism can be implemented by just solving two linear programs, whereas the MBC mechanism has a higher complexity. The empirical study shows that the MBC mechanism achieves higher efficiency over the BC-LP mechanism and that both outperform the KSM-TR mechanism, the only known truthful mechanism for a more restrictive exchange market.