Title: Inefficiencies in Online Markets with “Margin-Based” Transaction Fees
Abstract: We study a class of double auctions with “margin-based” transaction fees, that is, where the market maker takes some percentage of the difference between bid/ask and clearing price. These games cover a broad spectrum of existing auction settings ranging from the standard Walrasian double auction to markets a la 'Name-Your-Own-Price'. We provide a complete characterization of symmetric Bayesian Nash equilibria, and quantify the extent of strategic bid/ask behavior and the resulting market inefficiencies. We show that, in contrast to what is known in the Walrasian double auction where market inefficiencies (quickly) vanish as the market size increases, double auctions with “margin-based” transaction fees generally are characterized by considerable ex-post inefficiency even in large markets.
