Convergence to Efficiency in a Simple Market with Incomplete Information
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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Volume (Year): 62 (1994)
Issue (Month): 5 (September)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harsanyi, John C, 1995.
"Games with Incomplete Information,"
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- Mark A. Satterthwaite & Steven R. Williams, 1989. "The Rate of Convergence to Efficiency in the Buyer's Bid Double Auction as the Market Becomes Large," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 477-498.
- McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
- 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.
- 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.
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