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Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price

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  • Gianni De Fraja
  • Jozsef Sakovics

Abstract

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.

Suggested Citation

  • Gianni De Fraja & Jozsef Sakovics, 2001. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 842-863, August.
  • Handle: RePEc:ucp:jpolec:v:109:y:2001:i:4:p:842-863
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    References listed on IDEAS

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    1. Douglas Gale, 1988. "Price Setting and Competition in a Simple Duopoly Model," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 729-739.
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    7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    8. Melvyn G. Coles & Abhinay Muthoo, 1998. "Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium," Review of Economic Studies, Oxford University Press, vol. 65(2), pages 235-260.
    9. Curtis R. Taylor, 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, Oxford University Press, vol. 110(3), pages 837-855.
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