An Ascending Double Auction

We show why the failure of the affiliation assumption prevents the double auction from achieving efficient outcomes when values are interdependent. This motivates the study of an ascending price version of the double auction. It is shown that when there is a sufficiently large, but still finite, number of sellers, this mechanism has an approximate perfect Bayesian equilibrium in which traders continue bidding if and only if their true estimates of the ’value’ of the object being traded exceed the current price. This equilibrium is ex post efficient and has a rational expectations property in the sense that along the equilibrium path traders appear to have made the best possible trades conditional on information revealed by the trading process.