ABSTRACT
This chapter uses data from 30 previously conducted laboratory markets to investigate the price-formation process in continuous double auctions (DA). Standard empirical techniques are frustrated by the absence of field data on individual preferences, costs, and information; typically equilibrium must be assumed to interpret the data. The chapter argues that use of all market information—bids, asks, and transactions—and is based primarily on the theoretical models of Wilson and Friedman and the zero-intelligence algorithm from D. K. Gode and S. Sunder. Standard economic analysis presumes that a new equilibrium will be achieved in due course, perhaps more rapidly in some markets than in others, at which point the body of economic theory again becomes relevant. The chapter deals with price formation within a continuous DA trading period. It is concerned with the continuous DA, the trading institution most widely used in laboratory markets and field markets for homogeneous goods.
