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Competitive Behavior in Market Games: Evidence and Theory

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Author Info
John Duffy
Alexander Matros
Ted Temzelides

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Abstract

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1972). Market games obtain Pareto inferior (strict) Nash equilibria, in which some markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibrium they achieve approximates the associated Walrasian equilibrium of the underlying economy. Motivated by these findings, we investigate theoretically whether evolutionary forces lead to Walrasian outcomes in market games. We introduce a strong version of evolutionary stable strategies (SESS) for finite populations. Our concept requires stability against deviations by coalitions of agents. A small coalition of trading agents is sufficient for Pareto-improving trade to be generated. In addition, provided that agents lack market power, Nash equilibria corresponding to approximate competitive outcomes constitute the only approximate SESS.

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Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 366.

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Date of creation: Sep 2008
Date of revision: Mar 2009
Handle: RePEc:pit:wpaper:366

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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  1. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October. [Downloadable!] (restricted)
  2. Timothy N. Cason & Daniel Friedman, 1997. "Price Formation in Single Call Markets," Econometrica, Econometric Society, vol. 65(2), pages 311-346, March.
  3. Fernando Vega-Redondo, 1997. "The Evolution of Walrasian Behavior," Econometrica, Econometric Society, vol. 65(2), pages 375-384, March.
  4. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215.
  5. Peck, James & Shell, Karl, 1990. "Liquid markets and competition," Games and Economic Behavior, Elsevier, vol. 2(4), pages 362-377, December. [Downloadable!] (restricted)
  6. Ghosal, Sayantan & Morelli, Massimo, 2004. "Retrading in market games," Journal of Economic Theory, Elsevier, vol. 115(1), pages 151-181, March. [Downloadable!] (restricted)
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  7. Pradeep Dubey & Martin Shubik, 1976. "A Closed Economic System with Production and Exchange Modelled as a Game of Strategy," Cowles Foundation Discussion Papers 429, Cowles Foundation, Yale University. [Downloadable!]
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  8. Isaac, R. Mark & Plott, Charles R., 1981. "The opportunity for conspiracy in restraint of trade : An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 2(1), pages 1-30, March. [Downloadable!] (restricted)
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  9. Postlewaite, A & Schmeidler, David, 1978. "Approximate Efficiency of Non-Walrasian Nash Equilibria," Econometrica, Econometric Society, vol. 46(1), pages 127-35, January. [Downloadable!] (restricted)
  10. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December. [Downloadable!] (restricted)
  11. Dubey, Pradeep & Shubik, Martin, 1978. "A theory of money and financial institutions. 28. The non-cooperative equilibria of a closed trading economy with market supply and bidding strategies," Journal of Economic Theory, Elsevier, vol. 17(1), pages 1-20, February. [Downloadable!] (restricted)
  12. Mark A. Satterthwaite & Steven R. Williams, 2002. "The Optimality of a Simple Market Mechanism," Econometrica, Econometric Society, vol. 70(5), pages 1841-1863, September. [Downloadable!] (restricted)
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