Impact of Market Design and Trading Network Structure on Market Efficiency

This paper investigates the influence of market design, market size, and trading network structure on market efficiency and trade participation rate. The study considers two market designs: Zero Intelligence Traders (ZIT) in Chamberlin’s bilateral haggling market and a greedy matching of traders on a network. Sellers and buyers are embedded in a random bipartite graph with varying network densities, and markets vary in size from 20 to 2000 traders. Simulations reveal that greedy matching generally leads to more efficient allocations than ZIT trading networks. By increasing the average degree of a trading network from 1 to 5 or 10, market efficiency can be significantly improved for both market designs, achieving \(89\%\) and \(95\%\) of maximum efficiency, respectively. The study also contradicts the common belief that larger markets are better, as no significant impact of market size was found. We discuss the policy implications of these results.