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Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price

  • Gianni De Fraja
  • Jozsef Sakovics

We extend the standard analysis of decentralized markets to allow for the possibility that traders interact simultaneously with more than one trader on the opposite side of the market. In contrast with the literature, we reconcile the Walrasian equilibrium with the outcome of decentralized strategic trade: we show that there exist generic matching technologies that determine local market conditions such that, as market frictions vanish, the equilibrium price is the one that would result in the static Walrasian market. Our analysis highlights the importance of local market conditions for the determination of equilibrium prices.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 109 (2001)
Issue (Month): 4 (August)
Pages: 842-863

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Handle: RePEc:ucp:jpolec:v:109:y:2001:i:4:p:842-863
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  1. Taylor, Curtis R, 1995. "The Long Side of the Market and the Short End of the Stick: Bargaining Power and Price Formation in Buyers', Sellers', and Balanced Markets," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 837-55, August.
  2. Coles, Melvyn G & Muthoo, Abhinay, 1994. "Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium," CEPR Discussion Papers 938, C.E.P.R. Discussion Papers.
  3. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  4. Harstad, Ronald M. & Kagel, John H. & Levin, Dan, 1990. "Equilibrium bid functions for auctions with an uncertain number of bidders," Economics Letters, Elsevier, vol. 33(1), pages 35-40, May.
  5. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
  6. Gale, Douglas, 1988. "Price Setting and Competition in a Simple Duopoly Model," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 729-39, November.
  7. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
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