Econometrica: Sep 1994, Volume 62, Issue 5

Convergence to Efficiency in a Simple Market with Incomplete Information<1041:CTEIAS>2.0.CO;2-W
p. 1041-1063

Aldo Rustichini, Mark A. Satterthwaite, Steven R. Williams

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 $O(1/m^2)$. 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.

Log In To View Full Content