Dynamic auction for efficient competitive equilibrium under price rigidities

Abstract

In an auction market where the price of each selling item is restricted to an admissible interval (price rigidities), a Walrasian equilibrium usually fails to exist. Dreze (1975) introduced a variant concept of Walrasian equilibrium based on rationing systems, named constrained Walrasian equilibrium, for modelling an economy with price rigidities. Talman and Yang (2008) further refined the concept and proposed a dynamic auction procedure that converges to a constrained Walrasian equilibrium. However, a constrained Walrasian equilibrium does not guarantee market efficiency. In other words, a constrained Walrasian equilibrium allocation does not necessarily lead to the best market value. In this paper, we introduce a concept of competitive equilibrium by weakening the concept of constrained Walrasian equilibrium and devise an dynamic auction procedure that generates an efficient competitive equilibrium. © 2011 Springer-Verlag.