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Bargaining and Markets: Complexity and the Walrasian Outcome

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Author Info

  • Hamid Sabourian

    (King's College, Cambridge, UK)

Abstract

Rubinstein and Wolinsky (1990b) consider a simple decentralized market in which agents either meet randomly or choose their partners volunatarily and bargain over the terms on which they are willing to trade. Intuition suggests that if there are no transaction costs, the outcome of this matching and bargaining game should be the unique competitive equilibrium. This does not happen. In fact, Rubinstein and Wolinsky show that any price can be sustained as a sequential equilibrium of this game. In this paper, I consider Rubinstein and Wolinsky's model and show that if the complexity costs of implementing strategies enter players' preferences (lexicographically), together with the standard payoff in the game, then the only equilibrium that survives is the unique competitive outcome. This will be done both for the random matching and for the voluntary matching models. Thus the paper demonstrates that complexity costs might have a role in providing a justification for the competitive outcome.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1249.

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Length: 42 pages
Date of creation: Jan 2000
Date of revision:
Publication status: Published in Journal of Economic Theory (June 2004), 116(2): 189-228
Handle: RePEc:cwl:cwldpp:1249

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Related research

Keywords: Bargaining; matching; complexity; automata; bounded rationality; competitive outcome; Walrasian equilibrium;

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References

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  1. Arial Rubinstein & Asher Wolinsky, 1985. "Equilibrium in a Market with Sequential Bargaining," Levine's Working Paper Archive 623, David K. Levine.
  2. Sabourian, Hamid, 1990. "Anonymous repeated games with a large number of players and random outcomes," Journal of Economic Theory, Elsevier, vol. 51(1), pages 92-110, June.
  3. Piccione, M. & Rubinstein, A., 1992. "Finite Automata Play A Repeated Extensive Game," Papers 5-92, Tel Aviv.
  4. Ehud Kalai & Alejandro Neme, 1989. "The Strength of a Little Perfection," Discussion Papers 858, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  6. Binmore, K. & Piccione, M. & Samuelson, L., 1996. "Evolutionary Stability in Alternating-Offers Bargaining Games," Working papers 9603r, Wisconsin Madison - Social Systems.
  7. Abreu, Dilip & Rubinstein, Ariel, 1988. "The Structure of Nash Equilibrium in Repeated Games with Finite Automata," Econometrica, Econometric Society, vol. 56(6), pages 1259-81, November.
  8. Gul, Faruk, 1989. "Bargaining Foundations of Shapley Value," Econometrica, Econometric Society, vol. 57(1), pages 81-95, January.
  9. Binmore, Ken & Piccione, Michele & Samuelson, Larry, 1998. "Evolutionary Stability in Alternating-Offers Bargaining Games," Journal of Economic Theory, Elsevier, vol. 80(2), pages 257-291, June.
  10. Binmore, Ken G & Herrero, M J, 1988. "Matching and Bargaining in Dynamic Markets," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 17-31, January.
  11. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
  12. David K. Levine & Wolfgang Pesendorfer, 1995. "When Are Agents Negligible?," Levine's Working Paper Archive 96, David K. Levine.
  13. Chatterjee, Kalyan & Bhaskar Dutta & Debraj Ray & Kunal Sengupta, 1993. "A Noncooperative Theory of Coalitional Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 463-77, April.
  14. Piccione Michele & Rubinstein Ariel, 1993. "Finite Automata Play a Repeated Extensive Game," Journal of Economic Theory, Elsevier, vol. 61(1), pages 160-168, October.
  15. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-50, July.
  16. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
  17. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
  18. McLennan, Andrew & Sonnenschein, Hugo, 1991. "Sequential Bargaining as a Noncooperative Foundation for Walrasian Equilibrium," Econometrica, Econometric Society, vol. 59(5), pages 1395-1424, September.
  19. Arial Rubinstein & Asher Wolinsky, 1990. "Decentralized Trading, Strategic Behaviour and the Walrasian Outcome," Levine's Working Paper Archive 622, David K. Levine.
  20. Green, Edward J., 1980. "Noncooperative price taking in large dynamic markets," Journal of Economic Theory, Elsevier, vol. 22(2), pages 155-182, April.
  21. Gale,Douglas, 2000. "Strategic Foundations of General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521644105, October.
  22. Ehud Kalai, 1987. "Bounded Rationality and Strategic Complexity in Repeated Games," Discussion Papers 783, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Douglas Gale & Hamid Sabourian, 2003. "Complexity and Competition, Part I: Sequential Matching," Levine's Bibliography 666156000000000199, UCLA Department of Economics.

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