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Competitive Behavior in Market Games: Evidence and Theory

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<mark>Journal publication date</mark>07/2011
<mark>Journal</mark>Journal of Economic Theory
Issue number4
Volume146
Number of pages27
Pages (from-to)1437-1463
Publication statusPublished
Original languageEnglish

Abstract

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1972). Market games obtain Pareto inferior (strict) Nash equilibria, in which some markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibrium they achieve approximates the associated Walrasian equilibrium of the underlying economy. Motivated by these findings, we investigate theoretically whether evolutionary forces lead to Walrasian outcomes in market games. We introduce a strong version of evolutionary stable strategies (SESS) for finite populations. Our concept requires stability against deviations by coalitions of agents. A small coalition of trading agents is sufficient for Pareto-improving trade to be generated. In addition, provided that agents lack market power, Nash equilibria corresponding to approximate competitive outcomes constitute the only approximate SESS.