Approximately Efficient Bilateral Trade

TL;DR

This paper demonstrates a simple mechanism that guarantees a constant fraction of the optimal gains-from-trade in bilateral trade, overcoming the classical impossibility result by Myerson and Satterthwaite.

Contribution

It provides the first positive, simple mechanism achieving a constant-factor approximation to the optimal trade gains in bilateral trade.

Findings

A simple mechanism guarantees a constant fraction of the first-best gains-from-trade.

The classical impossibility result can be circumvented with approximate efficiency.

The mechanism is incentive-compatible, individually rational, and weakly budget balanced.

Abstract

We study bilateral trade between two strategic agents. The celebrated result of Myerson and Satterthwaite states that in general, no incentive-compatible, individually rational and weakly budget balanced mechanism can be efficient. I.e., no mechanism with these properties can guarantee a trade whenever buyer value exceeds seller cost. Given this, a natural question is whether there exists a mechanism with these properties that guarantees a constant fraction of the first-best gains-from-trade, namely a constant fraction of the gains-from-trade attainable whenever buyer's value weakly exceeds seller's cost. In this work, we positively resolve this long-standing open question on constant-factor approximation, mentioned in several previous works, using a simple mechanism.