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Strategy-proofness and Markets

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  • Mark A. Satterthwaite

Abstract

If a market is considered to be a social choice function, then the domain of admissible preferences is restricted and standard social choice theorems do not apply. A substantial body of analysis, however, strongly supports the notion that attractive strategy-proof social choice functions do not exist in market settings. Yetprice theory, which implicityly assumes the strategy-proofness of markets, performs quie well in describing many real markets. This paper resolves this paradox in two steps. First, given that a market is not strategy-proof, it should be modeled as a Bayesian game of incomplete information. Second, a double auction market, which is perhaps the simplest operationalization of supply and demand as a Bayesian game, is approximately strategy-proof even when the number of traders on each side of the market is quite moderate.

Suggested Citation

  • Mark A. Satterthwaite, 1999. "Strategy-proofness and Markets," Discussion Papers 1255, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1255
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    1. Gibbard, Allan, 1978. "Straightforwardness of Game Forms with Lotteries as Outcomes," Econometrica, Econometric Society, vol. 46(3), pages 595-614, May.
    2. Barbera, Salvador & Jackson, Matthew O, 1995. "Strategy-Proof Exchange," Econometrica, Econometric Society, vol. 63(1), pages 51-87, January.
    3. Gul, Faruk & Postlewaite, Andrew, 1992. "Asymptotic Efficiency in Large Exchange Economies with Asymmetric Information," Econometrica, Econometric Society, vol. 60(6), pages 1273-1292, November.
    4. Barbera, Salvador & Sonnenschein, Hugo & Zhou, Lin, 1991. "Voting by Committees," Econometrica, Econometric Society, vol. 59(3), pages 595-609, May.
    5. Gibbard, Allan, 1973. "Manipulation of Voting Schemes: A General Result," Econometrica, Econometric Society, vol. 41(4), pages 587-601, July.
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