Complexity and competition

Douglas Gale, Hamid Sabourian

    Research output: Contribution to journalArticle

    Abstract

    Extensive-form market games typically have a large number of noncompetitive equilibria. In this paper, we argue that the complexity of noncompetitive behavior provides a justification for competitive equilibrium in the sense that if rational agents have an aversion to complexity (at the margin), then maximizing behavior will result in simple behavioral rules and hence in a competitive outcome. For this purpose, we use a class of extensive-form dynamic matching and bargaining games with a finite number of agents. In particular, we consider markets with heterogeneous buyers and sellers and deterministic, exogenous, sequential matching rules, although the results can be extended to other matching processes. If the complexity costs of implementing strategies enter players' preferences lexicographically with the standard payoff, then every equilibrium strategy profile induces a competitive outcome.

    Original languageEnglish (US)
    Pages (from-to)739-769
    Number of pages31
    JournalEconometrica
    Volume73
    Issue number3
    DOIs
    StatePublished - May 2005

    Keywords

    • Bargaining
    • Competition
    • Complexity
    • Equilibrium
    • Markov strategies
    • Matching

    ASJC Scopus subject areas

    • Economics and Econometrics

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