What is a double auction?

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A dual auction is a selling process in which buyers and sellers submit bids and ask prices from an auctioneer simultaneously, and that party determines a clearing price for the sale. An auctioneer is not always necessary; the speakerphone system used in some stock markets is an example of a double auction where no one mediates between buyers and sellers. This technique can have variable impacts on prices and can drive them beyond breakeven.

In addition to being a selling technique, the double auction is also a topic of intense study. Social scientists, game theorists and economists like to look at this model to learn more about the behavior of buyers and sellers. A deeper understanding of market behaviors can help explain events that appear to be mediated by human activity, such as a sudden rise or fall in prices. With a double action, game theory comes into significant play as buyers and sellers vie for the most advantageous position.

When an auctioneer is involved, that person receives all bids and selling prices and determines the clearing price, the bid that will match the highest number of bids to sell all the merchandise in question. Buyers who bid at that price or higher will pay that price to sellers who bid at that price or below. Sellers who asked a lot won’t clean up, while buyers who underbid will walk away with nothing.

It is possible for a computer to act as an auctioneer in a dual auction. The computer solves the equation to move the greatest number of goods, given the prices asked and offered. This can sometimes result in a stalemate where the price differential is so significant that the parties cannot come to a happy meeting point in the middle. In this situation, you may need to run the auction again to determine a sell price.

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Live auctions allow everyone to hear what is being asked and bid on. Bidders can raise their bids if they want a better chance of hitting a selling price, and bidders can also raise their selling prices if they feel bidders are willing to go higher. This can result in very rapid price escalation as sides play against each other before reaching a price ceiling and trading activity becomes less robust. Buyers and sellers adept at locating and taking advantage of this ceiling can make a significant profit through the dual auction approach.

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