The Double Auction is like an “Econ Lab” to illustrate

• How markets work

• How good the competitive equilibrium model (supply and demand) is as a model of a market

• Experimental economics– An important branch of economic research

today with many real world applications

Key Features of a Double Auction

• Both sellers and buyers call out prices– Buyers “bid” and sellers “ask”

• Trading takes place during a trading period

• A trade take place when – a buyer accepts a sellers ask– a seller accepts a buyers bid

Buyers

• each buyer has a “marginal benefit” table for the good

• gain or reward is the difference between marginal benefit and the price – try to get a low price, but compete with other

buyers

• Any new bid must be higher than outstanding bid

Sellers

• each seller has a “marginal cost” schedule for the good

• seller’s gain or reward is the difference between the price and the marginal cost– try to get a high price, but must compete with

other sellers

• Any new ask must be lower than outstanding ask

07_01 THE MODEL TO EXPLAIN ITTHE MARKET INTERACTION

QUANTITY DEMANDED

Market demand

26 buyers (consumers)

A

ZN

LB

GX R

M

Q

TK

C

I

D ES

J

WV

UF P

A HY

O

Y H IB

BJ

Y

F

E

SC

G

Z

QP L

D

R

H

VUO

K

T

N

M

XI

WA

AL

M DU

N

CZ

OP

V B

S W Q

G X YH R

FT E

K J

I

U

G SZ

EO

PXD

LJ

R

V

T

F

C

KQ W

N

M

PRICE

QUANTITY SUPPLIED

Model of Firm Behavior

Competitive Equilibrium Model

Model of Consumer Behavior

QUANTITY

Market supply

Market supply

PRICE

Market demand

PRICE

26 sellers (firms)

Market: Interaction of 26 consumers and 26 firms

07_03A

$25

20

15

10

5

Buyer A

Items MB1 2 3 4 5

25 20 15 10 5

$25

20

15

10

5

Buyer B

Items MB1 2 3 4 5

24 19 14 9 4

$25

20

15

10

5

Buyer C

Items MB1 2 3 4 5

23 18 13 8 3

$25

20

15

10

5

Buyer D

Items MB1 2 3 4 5

22 17 12 7 2

1 2 3 4 50 1 2 3 4 50 1 2 3 4 50 1 2 3 4 50 1 2 3 4 50

$25

20

15

10

5

Buyer E

Items MB1 2 3 4 5

21 16 11 6 1

Individual Demand Curves

07_03B PRICE

QUANTITY5 10 15 20 25

$25

20

15

10

5

0

07_01 THE MODEL TO EXPLAIN ITTHE MARKET INTERACTION

QUANTITY DEMANDED

Market demand

26 buyers (consumers)

A

ZN

LB

GX R

M

Q

TK

C

I

D ES

J

WV

UF P

A HY

O

Y H IB

BJ

Y

F

E

SC

G

Z

QP L

D

R

H

VUO

K

T

N

M

XI

WA

AL

M DU

N

CZ

OP

V B

S W Q

G X YH R

FT E

K J

I

U

G SZ

EO

PXD

LJ

R

V

T

F

C

KQ W

N

M

PRICE

QUANTITY SUPPLIED

Model of Firm Behavior

Competitive Equilibrium Model

Model of Consumer Behavior

QUANTITY

Market supply

Market supply

PRICE

Market demand

PRICE

26 sellers (firms)

Market: Interaction of 26 consumers and 26 firms

05_A

This is 2 meters high.

No, it's 50 meters high.

Demand curve

Price2 meters

10

20

30

40

50

Dupuit's Vision of Consumer Surplus

07_2A

Q

$2.00

1.00

Ken buys 4.

P

1 2 3 4 5 6

$2.00

1.00

P

1 2 3 4 5 6

$2.00

1.00

0Q

Maria buys 4.

P

1 2 3 4 5 6

$2.00

1.00

1.80

.80

1.60

.60

1.40

.40

1.20

.20

0

DD

Q

Hugo produces 5.

P

1 2 3 4 5 6

$2.00

1.00

0

Q

Mimi produces 3.

P

1 2 3 4 5 6

$2.00

1.00

0

S

S

07_04A

1 2 3 4 50

$25

20

15

10

5

Seller A

Items MC1 2 3 4 5

5 10 15 20 25

1 2 3 4 50

$25

20

15

10

5

1 2 3 4 50

$25

20

15

10

5

1 2 3 4 50

$25

20

15

10

5

1 2 3 4 50

$25

20

15

10

5

Seller B

Items MC1 2 3 4 5

4 9

141924

Seller C

Items MC1 2 3 4 5

3 8

13 18 23

Seller D

Items MC1 2 3 4 5

2 7

12 17 22

Seller E

Items MC1 2 3 4 5

1 6

11 16 21

Individual Supply Curves

07_04B PRICE

QUANTITY5 10 15 20 25

$25

20

15

10

5

0

07_05 PRICE

QUANTITY5 10 15 20 25

$25

20

15

10

5

0

Market supply curve

Market demand curve

Observe Actual Double Auction

• Notice sellers and buyers first examine marginal costs and marginal benefits

• During the trading period– Notice how bids, asks, and trades are posted on

the board– Notice how the price changes during the trading

period