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Strategy-proofness and markets

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  • Mark A. Satterthwaite

    () (Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA)

Abstract

If a market is considered to be a social choice function, then the domain of admissible preferences is restricted and standard social choice theorems do not apply. A substantial body of analysis, however, strongly supports the notion that attractive strategy-proof social choice functions do not exist in market settings. Yet price theory, which implicitly assumes the strategy-proofness of markets, performs quite well in describing many real markets. This paper resolves this paradox in two steps. First, given that a market is not strategy-proof, it should be modeled as a Bayesian game of incomplete information. Second, a double auction market, which is perhaps the simplest operationalization of supply and demand as a Bayesian game, is approximately strategy-proof even when the number of traders on each side of the market is quite moderate.

Suggested Citation

  • Mark A. Satterthwaite, 2001. "Strategy-proofness and markets," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 18(1), pages 37-58.
  • Handle: RePEc:spr:sochwe:v:18:y:2001:i:1:p:37-58
    Note: Received: 24 March 1999/Accepted: 25 October 1999
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    Cited by:

    1. Serizawa, Shigehiro, 2002. "Inefficiency of Strategy-Proof Rules for Pure Exchange Economies," Journal of Economic Theory, Elsevier, vol. 106(2), pages 219-241, October.
    2. Schummer, James, 2004. "Almost-dominant strategy implementation: exchange economies," Games and Economic Behavior, Elsevier, vol. 48(1), pages 154-170, July.
    3. Serizawa, Shigehiro & Weymark, John A., 2003. "Efficient strategy-proof exchange and minimum consumption guarantees," Journal of Economic Theory, Elsevier, vol. 109(2), pages 246-263, April.
    4. Mark Satterthwaite & Artyom Shneyerov, 2003. "Convergence of a Dynamic Matching and Bargaining Market with Two-sided Incomplete Information to Perfect Competition," Discussion Papers 1384, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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