Supply, Demand and Zero-Intelligence: Shape Matters

Abstract

This paper applies a simple sequential bargaining (SB) as a proxy for the continuous double auction (CDA) to study how the shape of supply and demand curves makes similar outcomes between the two markets populated by zero-intelligence (ZI) agents. At first, we derive analytical expressions for transaction probabilities of ZI pairs in the SB, as well as the three expected outcomes. Those are the allocative efficiency (AE), the average trading price, and the trading volume. Then, we conduct simulations by transferring the identical supply and demand functions from the SB to the CDA because of the complexity of its period. They produce similar statistical results as in the SB although the AE in the CDA is a little higher than that in the SB, while the trading volume is a little smaller than that in the SB. Statistical properties still hold for special shapes that make the long-run outcomes of CDA and the expected outcomes of SB deviate a lot from their corresponding competitive equilibriums. It is concluded that transaction probabilities or frequencies of ZI pairs help to explain how the principle of statistics determines both expected outcomes of a SB and long-run outcomes of a CDA populated by ZI agents.