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Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price

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Abstract

We extend the standard analysis of decentralized markets allowing for the possibility that traders interact simultaneously with more than one trader on the opposite side if the market. In contrast to the literature, we are able to reconcile the Walrasian equilibrium with the outcome of decentralized strategic trade: we show that there exist generic matching mechanisms which determine local market conditions such that, as market frictions vanish, the expected equilibrium price is the one that would result in the static Walrasian market. At the same time, we highlight the relevance of local market conditions in the determination of equilibrium prices.

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  • Gianni De Fraja & Jozsef Sakovics, 1999. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," ESE Discussion Papers 36, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:36
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    1. 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.
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    6. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
    7. 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.
    8. 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.
    9. 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.
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    Keywords

    decentralised markets; price formation; walrasian equilibrium;

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