Bargaining and markets: complexity and the competitive outcome [An article from: Journal of Economic Theory]

This digital document is a journal article from Journal of Economic Theory, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
Rubinstein and Wolinsky (Rev. Econ. Stud. 57 (1990) 63-78) consider a simple decentralised market game in which agents meet randomly or voluntarily and bargain over the terms of trade. They show that any individually rational price can be sustained as a sequential equilibrium even though the model has a unique competitive outcome. Here, I consider Rubinstein and Wolinsky's model and show that if complexity costs of implementing strategies enter players' preferences, together with the standard payoff in the game, then every equilibrium is stationary/Markov and induces the unique competitive price. Thus, I demonstrate that aversion to complexity may provide a justification for the competitive outcome.