COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1534

PERFECT COMPETITION IN A BILATERAL MONOPOLY
(In honor of Martin Shubik)

Pradeep Dubey and Dieter Sondermann

September 2005

We show that if limit orders are required to vary smoothly, then strategic (Nash) equilibria of the double auction mechanism yield competitive (Walras) allocations. It is not necessary to have competitors on any side of any market: smooth trading is a substitute for price wars. In particular, Nash equilibria are Walrasian even in a bilateral monopoly.

Keywords: Limit orders, double auction, Nash equilibria, Walras equilibria, perfect competition, bilateral monopoly, mechanism design

JEL Classification: C72, D41, D42, D44, D61

Center for Game Theory, Dept. of Economics, SUNY at Stony Brook and Cowles Foundation, Yale University

Department of Economics, University of Bonn, Bonn