Algorithm of price adjustment for market equilibrium

Yurii Nesterov () and Vladimir Shikhman ()
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Yurii Nesterov: Universitécatholique de Louvain, CORE, Belgium
Vladimir Shikhman: Université catholique de Louvain, CORE, Belgium

No 2015001, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In this paper, we suggest an algorithm for price adjustment towards a partial market equilibrium. Its convergence properties are crucially based on Convex Analysis. Our price adjustment corresponds to a subgradient scheme for minimizing a special nonsmooth convex function. This function is the total excessive revenue of the market’s participants [16, 18], and its minimizers are equilibrium prices. As the main result, the algorithm of price adjustment is shown to converge to equilibrium prices. Additionally, a market equilibrium clears on average during the price adjustment process. This means that the market clears by historical averages of supply and demand. Moreover, an efficient rate of convergence is obtained. Additionally, we endow our algorithm with decentralized prices by introducing the trade design. The latter suggests that producers settle and update their individual prices, and consumers buy at the lowest purchase price. The proposed price adjustment enjoys a natural behavioral interpretation. First, producers forecast their individual prices to be proportional to their excess demands. For the price update, they subsequently apply an average of these price forecasts over time

Keywords: price adjustment; nonsmooth convex optimization; subgradient methods; decentralization of prices; partial equilibrium; historical averaging (search for similar items in EconPapers)
Date: 2015-01-25
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Citations: View citations in EconPapers (6)

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