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Convergence to Efficiency in a Simple Market with Incomplete Information
Aldo Rustichini, Mark A. Satterthwaite and Steven R. Williams
Econometrica
Vol. 62, No. 5 (Sep., 1994), pp. 1041-1063
Published by: The Econometric Society
Article DOI: 10.2307/2951506
Stable URL: http://www.jstor.org/stable/2951506
Page Count: 23
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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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Econometrica © 1994 The Econometric Society