Activity Rules for an Iterated Double Auction

The purpose of market design is to increase the efficiency of the market outcome by suppressing strategic behavior or rendering it ineffective. One part of this task is to eliminate loopholes in the procedural rules that might be exploited by a wily trader, but the more fundamental part is to devise rules that promote efficiency. In the case of an iterated multi-market auction, the key requirement is reliable price discovery. That is, the rules should encourage suppliers to reveal their costs, and demanders their values, steadily throughout the bidding process. This is necessary because any one supplier typically relies on the pattern of prices across the markets to devise its optimal bidding strategy, taking account of its variable and fixed costs of operation. Similarly, each demander relies on the pattern of prices to construct its optimal plan of purchases, taking account of complementarities and substitution among the products offered in the several markets. Efficiency of the final outcome therefore depends on early, and as the auction proceeds, progressively more accurate revelation by all traders.