Convergence to Efficiency in a Simple Market with Incomplete Information

Aldo Rustichini, Mark A Satterthwaite and Steven R Williams

Econometrica, 1994, vol. 62, issue 5, 1041-63

Abstract: A model 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. The authors show that, in any equilibrium, the amount by which a trader misreports is O(1/m) and the corresponding inefficiency is O(1/m[squared]). 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. Copyright 1994 by The Econometric Society.

Date: 1994
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Working Paper: Convergence to Efficiency in a Simple Market with Incomplete Information (1992)
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