Complexity and Competition, Part I: Sequential Matching
This paper uses the complexity of non-competitive behaviour to provide a new justification for competitive equilibrium in the context of extensive-form market games with a finite number of agents. This paper demonstrates that if rational agents have (at least at the margin) an aversion for complex behaviours then their maximizing behaviour will result in simple behavioural rules and thereby in a perfectly competitive outcome. In particular, we consider sequential market games with heterogeneous sets of buyers and sellers and show that if the complexity costs of implementing strategies enter players’ preferences, together with the standard payoff in the game, then every equilibrium strategy profile induces a competitive outcome. This is done for sequential deterministic matching/bargaining models in which at any date either the identities of the matched players are determined exogenously or one player is exogenously selected to choose his partner and make a price proposal.
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- Gale, D. & Sabourian, H., 2003.
"Markov Equilibria in Dynamic Matching and Bargaining Games,"
Cambridge Working Papers in Economics
0322, Faculty of Economics, University of Cambridge.
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Cambridge Working Papers in Economics
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- Ariel Rubinstein, 1997. "Finite automata play the repeated prisioners dilemma," Levine's Working Paper Archive 1639, David K. Levine.
- Hamid Sabourian, 2000. "Bargaining and Markets: Complexity and the Walrasian Outcome," Cowles Foundation Discussion Papers 1249, Cowles Foundation for Research in Economics, Yale University.
- Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
- K. G. Binmore & M. J. Herrero, 1988. "Matching and Bargaining in Dynamic Markets," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 17-31.
- Kalai, E & Neme, A, 1992. "The Strength of a Little Perfection," International Journal of Game Theory, Springer;Game Theory Society, vol. 20(4), pages 335-355.
- McLennan, Andrew & Sonnenschein, Hugo, 1991. "Sequential Bargaining as a Noncooperative Foundation for Walrasian Equilibrium," Econometrica, Econometric Society, vol. 59(5), pages 1395-1424, September.
- Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
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