A Generalized Bilateral Trading Model

Rongchuan Tao

doi:10.4236/ojbm.2018.63046

Abstract

In the bilateral trading model developed by Myerson [1], an ex post efficient mechanism that satisfies incentive compatibility and individual rationality has been proved to be not existed. This paper is aimed at the discussion of modified bilateral trading model where the buyer and seller’s valuations for the object are assumed to be not independent. Under such assumption, we concern about the existence of an ex post efficient mechanism satisfying individual compatible and individual rational conditions. We will give a necessary condition of such mechanism, not precisely though, to identify the existence. At the end of this paper, we provide some empirical evidences about the non-independent assumption and suggest some directions for further research, both empirical and theoretical.

Highlights

Uncertainty and asymmetric information have been under central discussion in mechanism design and auction theories
In the bilateral trading model developed by Myerson [1], an ex post efficient mechanism that satisfies incentive compatibility and individual rationality has been proved to be not existed
We concern about the existence of an ex post efficient mechanism satisfying individual compatible and individual rational conditions

Summary

Introduction

Uncertainty and asymmetric information have been under central discussion in mechanism design and auction theories. Tao need to design a mechanism or a tariff to ensure each player is willing to participate in and the mechanism exhibits desirable features in maximizing the net utility of both players Such normal mechanism is characterized in terms of individual rationality, incentive compatibility, and ex post efficiency. Previous research about bilateral trading problem ([7] [8]) or optimal auction design showed the impossibility of designing a mechanism that is individual rational, incentive compatible and ex post efficient without outside subsidy.

Basic Settings of Generalized Model

Individual Rationality and Incentive Compatibility

The Existence of an Ex Post Efficient Mechanism

Further Interpretations

Conclusion