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Convergence to Price-Taking Behavior in a Simple Market

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  • Aldo Rustichini

Abstract

An independent private values model of trade with m buyers and m sellers is considered in which price is chosen to equate revealed demand and supply. In ever symmetric Bayesian Nash equilibrium, each trader does not act as a price-taker, but instead strategically misrepresents his true demand/supply to influence price in his favor. This misrepresentation causes inefficiency. It is shown that the amount by which a trader misreports is 0(1/m) and the corresponding influence is 0(1/m^2). Price-taking behavior and its associated efficiency thus quickly emerges despite the asymmetric information and the noncooperative behavior of traders.

Suggested Citation

  • Aldo Rustichini, 1990. "Convergence to Price-Taking Behavior in a Simple Market," Discussion Papers 914, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:914
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    References listed on IDEAS

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    1. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    2. Wilson, Robert B, 1985. "Incentive Efficiency of Double Auctions," Econometrica, Econometric Society, vol. 53(5), pages 1101-1115, September.
    3. Mark A. Satterthwaite & Steven R. Williams, 1989. "The Rate of Convergence to Efficiency in the Buyer's Bid Double Auction as the Market Becomes Large," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 477-498.
    4. Wolinsky, Asher, 1990. "Information Revelation in a Market with Pairwise Meetings," Econometrica, Econometric Society, vol. 58(1), pages 1-23, January.
    5. Satterthwaite, Mark A. & Williams, Steven R., 1989. "Bilateral trade with the sealed bid k-double auction: Existence and efficiency," Journal of Economic Theory, Elsevier, vol. 48(1), pages 107-133, June.
    6. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    7. Roberts, Donald John & Postlewaite, Andrew, 1976. "The Incentives for Price-Taking Behavior in Large Exchange Economies," Econometrica, Econometric Society, vol. 44(1), pages 115-127, January.
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    Cited by:

    1. Mark A. Satterthwaite & Steven R. Williams, 1991. "The Double Auction Market: Institutions," Discussion Papers 971, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Rustichini, Aldo & Satterthwaite, Mark A & Williams, Steven R, 1994. "Convergence to Efficiency in a Simple Market with Incomplete Information," Econometrica, Econometric Society, vol. 62(5), pages 1041-1063, September.
    3. Herrmann, John D. & Kahn, Peter J., 1999. "A continuity property for local price adjustment mechanisms," Journal of Mathematical Economics, Elsevier, vol. 31(4), pages 419-453, May.

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