Strategy-proofness and markets

Mark A. Satterthwaite ()
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Mark A. Satterthwaite: Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA

Social Choice and Welfare, 2001, vol. 18, issue 1, 37-58

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. Yet price theory, which implicitly assumes the strategy-proofness of markets, performs quite 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.

Date: 2001-01-10
Note: Received: 24 March 1999/Accepted: 25 October 1999
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