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Complexity and Competition

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  • Douglas Gale
  • Hamid Sabourian

Abstract

Extensive-form market games typically have a large number of noncompetitive equilibria. In this paper, we argue that the complexity of noncompetitive behavior provides a justification for competitive equilibrium in the sense that if rational agents have an aversion to complexity (at the margin), then maximizing behavior will result in simple behavioral rules and hence in a competitive outcome. For this purpose, we use a class of extensive-form dynamic matching and bargaining games with a finite number of agents. In particular, we consider markets with heterogeneous buyers and sellers and deterministic, exogenous, sequential matching rules, although the results can be extended to other matching processes. If the complexity costs of implementing strategies enter players' preferences lexicographically with the standard payoff, then every equilibrium strategy profile induces a competitive outcome. Copyright The Econometric Society 2005.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 73 (2005)
Issue (Month): 3 (05)
Pages: 739-769

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Handle: RePEc:ecm:emetrp:v:73:y:2005:i:3:p:739-769

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Citations

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Cited by:
  1. Katerina Sherstyuk, 2011. "Complexity and bidder behavior in iterative auctions," Economics Bulletin, AccessEcon, vol. 31(4), pages 2769-2776.
  2. Lauermann, Stephan, 2011. "Dynamic matching and bargaining games: A general approach," MPRA Paper 31717, University Library of Munich, Germany.
  3. Penta, Antonio, 2011. "Multilateral bargaining and Walrasian equilibrium," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 417-424.
  4. Muto, Nozomu, 2014. "Strategic complexity in repeated extensive games," Games and Economic Behavior, Elsevier, vol. 83(C), pages 45-52.
  5. Eilon Solan & Penélope Hernández, 2014. "Bounded Computational Capacity Equilibrium," Discussion Papers in Economic Behaviour 0314, University of Valencia, ERI-CES.
  6. Hamid Sabourian & Jihong Lee, 2004. "Complexity and Efficiency in the Negotiation Game," Econometric Society 2004 North American Winter Meetings 82, Econometric Society.
  7. Hamid Sabourian & Jihong Lee, 2004. "Complexity and Efficiency in Repeated Games with Negotiation," Econometric Society 2004 Far Eastern Meetings 401, Econometric Society.
  8. Mark Armstrong & Steffen Huck, 2010. "Behavioral Economics as Applied to Firms: A Primer," CPI Journal, Competition Policy International, vol. 6.
  9. Theodoros M. Diasakos, 2008. "Complexity and Bounded Rationality in Individual Decision Problems," Carlo Alberto Notebooks 90, Collegio Carlo Alberto.
  10. Yasuhiro Shirata, 2011. "Formation of Decentralized Manufacturer-Supplier Networked Market," Global COE Hi-Stat Discussion Paper Series gd11-186, Institute of Economic Research, Hitotsubashi University.
  11. Jihong Lee & Hamid Sabourian, 2005. "Efficiency in Negotiation: Complexity and Costly Bargaining," Birkbeck Working Papers in Economics and Finance 0505, Birkbeck, Department of Economics, Mathematics & Statistics.
  12. Lee, Jihong & Sabourian, Hamid, 2007. "Coase theorem, complexity and transaction costs," Journal of Economic Theory, Elsevier, vol. 135(1), pages 214-235, July.
  13. Bag, Parimal Kanti & Sabourian, Hamid & Winter, Eyal, 2009. "Multi-stage voting, sequential elimination and Condorcet consistency," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1278-1299, May.
  14. Kazuya Kamiya & Takashi Shimizu, 2006. "A Dynamic General Equilibrium Model with Centralized Auction Markets," CIRJE F-Series CIRJE-F-417, CIRJE, Faculty of Economics, University of Tokyo.
  15. Maria-Augusta Miceli & Federico Cecconi & Giovanni Cerulli, 2013. "Walrasian TatÈnnement by Sequential Pairwise Trading: Convergence and Welfare Implications," Working Papers 161, University of Rome La Sapienza, Department of Public Economics.
  16. Ortoleva, Pietro, 2008. "The Price of Flexibility: Towards a Theory of Thinking Aversion," MPRA Paper 12242, University Library of Munich, Germany.
  17. Penta, Antonio, 2007. "Collective Bargaining and Walrasian Equilibrium," MPRA Paper 10260, University Library of Munich, Germany, revised Sep 2007.
  18. Lee, J. & Sabourian, H., 2004. "Complexity and Efficiency in Repeated Games and Negotiation," Cambridge Working Papers in Economics 0419, Faculty of Economics, University of Cambridge.

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