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Bargaining and Markets: Complexity and the Walrasian Outcome

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  • Hamid Sabourian

    (King's College, Cambridge, UK)

Abstract

Rubinstein and Wolinsky (1990b) consider a simple decentralized market in which agents either meet randomly or choose their partners volunatarily and bargain over the terms on which they are willing to trade. Intuition suggests that if there are no transaction costs, the outcome of this matching and bargaining game should be the unique competitive equilibrium. This does not happen. In fact, Rubinstein and Wolinsky show that any price can be sustained as a sequential equilibrium of this game. In this paper, I consider Rubinstein and Wolinsky's model and show that if the complexity costs of implementing strategies enter players' preferences (lexicographically), together with the standard payoff in the game, then the only equilibrium that survives is the unique competitive outcome. This will be done both for the random matching and for the voluntary matching models. Thus the paper demonstrates that complexity costs might have a role in providing a justification for the competitive outcome.

Suggested Citation

  • Hamid Sabourian, 2000. "Bargaining and Markets: Complexity and the Walrasian Outcome," Cowles Foundation Discussion Papers 1249, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1249
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d12/d1249.pdf
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Kalyan Chatterjee & Bhaskar Dutia & Debraj Ray & Kunal Sengupta, 2013. "A Noncooperative Theory of Coalitional Bargaining," World Scientific Book Chapters, in: Bargaining in the Shadow of the Market Selected Papers on Bilateral and Multilateral Bargaining, chapter 5, pages 97-111, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Douglas Gale & Hamid Sabourian, 2003. "Complexity and Competition, Part I: Sequential Matching," Levine's Bibliography 666156000000000199, UCLA Department of Economics.
    2. Maenner, Eliot, 2008. "Adaptation and complexity in repeated games," Games and Economic Behavior, Elsevier, vol. 63(1), pages 166-187, May.
    3. Kalyan Chatterjee, 2002. "Complexity of Strategies and Multiplicity of Nash Equilibria," Group Decision and Negotiation, Springer, vol. 11(3), pages 223-230, May.
    4. Penta, Antonio, 2011. "Multilateral bargaining and Walrasian equilibrium," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 417-424.

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    More about this item

    Keywords

    Bargaining; matching; complexity; automata; bounded rationality; competitive outcome; Walrasian equilibrium;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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