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Convergence to Efficiency in a Simple Market with Incomplete Information

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  • Rustichini, Aldo
  • Satterthwaite, Mark A
  • Williams, Steven R

Abstract

A model with m buyers and m sellers is considered in which price is set to equate revealed demand and supply. In a Bayesian Nash equilibrium, each trader acts not as a price-taker but instead misrepresents his true demand/supply to influence price in his favor. This causes inefficiency. The authors show that, in any equilibrium, the amount by which a trader misreports is O(1/m) and the corresponding inefficiency is O(1/m[squared]). The indeterminacy and the inefficiency that is caused by the traders' bargaining behavior in small markets, thus, rapidly vanishes as the market increases in size. Copyright 1994 by The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 62 (1994)
Issue (Month): 5 (September)
Pages: 1041-63

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Handle: RePEc:ecm:emetrp:v:62:y:1994:i:5:p:1041-63

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  1. Wilson, Robert B, 1985. "Incentive Efficiency of Double Auctions," Econometrica, Econometric Society, vol. 53(5), pages 1101-15, September.
  2. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-819, November.
  3. McAfee, R. Preston., 1990. "A Dominant Strategy Double Auction," Working Papers 734, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Aldo Rustichini, 1990. "Convergence to Price-Taking Behavior in a Simple Market," Discussion Papers 914, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
  6. Satterthwaite, Mark A. & Williams, Steven R., 1989. "Bilateral trade with the sealed bid k-double auction: Existence and efficiency," Journal of Economic Theory, Elsevier, vol. 48(1), pages 107-133, June.
  7. Satterthwaite, Mark A & Williams, Steven R, 1989. "The Rate of Convergence to Efficiency in the Buyer's Bid Double Auction as the Market Becomes Large," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 477-98, October.
  8. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
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