Convergence To Efficiency in a Simple Market With Incomplete Information
(1994) Econometrica — Vol. 62, n° 5, p. 1041-1063 (1994)
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- Abstract
- A model of trade with m buyers and m sellers is considered in which price is set to equate revealed demand and supply. In a Bayesian Nash equilibrium, each trader acts not as a price-taker, but instead misrepresents his true demand/supply to influence price in his favor. This causes inefficiency. We show that in any equilibrium the amount by which a trader misreports is O(1/m) and the corresponding inefficiency is O(1/m2). The indeterminacy and the inefficiency that is caused by the traders' bargaining behavior in small markets thus rapidly vanishes as the market increases in size.
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Rustichini, A., Satterthwaite, MA., & Williams, SR. (1994). Convergence To Efficiency in a Simple Market With Incomplete Information. Econometrica, 62(5), 1041-1063. https://doi.org/10.2307/2951506 (Original work published 1994)