The effect of transaction costs on double auction markets

The ability of the continuous double auction to attain the competitive equilibrium outcome is one of the most robust results in experimental economics. In this paper, we study the sensitivity of the behavior of the double auction to the imposition of a monetary cost on the submission of offers to buy and sell. We find that, even with the transaction cost, prices converge toward the competitive equilibrium level. However, the presence of the transaction cost leads to lower quantity exchanged and market efficiency than in the competitive equilibrium. (C) 1998 Elsevier Science B.V. All rights reserved.