Local coordination and market equilibria

• Main Authors: CHATTERJI, Shurojit, GHOSAL, Sayantan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2004
• Subjects: coordination; markets; rationalizability; stability; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/1889; https://ink.library.smu.edu.sg/context/soe_research/article/2889/viewcontent/9714154.pdf
• Institution: Singapore Management University

We reformulate the local stability analysis of market equilibria in a competitive market as a local coordination problem in a market game, where the map associating market prices to best-responses of all traders is common knowledge and well-defined both in and out of equilibrium. Initial expectations over market variables differ from their equilibrium values and are not common knowledge. This results in a coordination problem as traders use the structure of the market game to converge back to equilibrium. We analyse a simultaneous move and a sequential move version of the market game and explore the link with local rationalizability.