Trade Reduction vs. Multi-Stage: A Comparison of Double Auction Design Approaches

With the growth of electronic markets, designing double auction mechanisms that can be applied to emerging market structures has become an important research topic. These new market structures contain some issues that have been ignored in most auction design literature. In this paper, we investigate two double auction design approaches, the Trade Reduction Approach and the Multi-Stage Design Approach, and compare the resulting mechanisms in various exchange environments. We find that comparing with the Trade Reduction Approach, the Multi-Stage Design Approach offers mechanisms in more complicated exchange environment. In addition, the mechanisms under the multi-stage design approach are superior to the mechanisms under the trade reduction approach, in terms of both social efficiency and individual payoffs, in each exchange environment of interest.