Wednesday, June 14, 2023

Testing Neoclassical Competitive Theory in Multilateral Decentralized Markets

By John A. List.

"Abstract

Walrasian tatonnement has been a fundamental assumption in economics ever since Walras' general equilibrium theory was introduced in 1874. Nearly a century after its introduction, Vernon Smith relaxed the Walrasian tatonnement assumption by showing that neoclassical competitive market theory explains the equilibrating forces in "double-auction" markets. I make a next step in this evolution by exploring the predictive power of neoclassical theory in decentralized naturally occurring markets. Using data gathered from two distinct markets- the sports card and collector pin markets-I find a tendency for exchange prices to approach the neoclassical competitive model prediction after a few market periods."

Also see Walrasian tâtonnement. This is the process where shortages cause prices to rise and surpluses cause prices to fall.

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