We reformulate the local stability analysis of market equilibria in a competitive market as a local coordination problem in a market game, where the map associating market prices to best-responses of all traders is common knowledge and well-defined both in and out of equilibrium. Initial expectations over market variables differ from their equilibrium values and are not common knowledge. This results in a coordination problem as traders use the structure of the market game to converge back to equilibrium. We analyse a simultaneous move and a sequential move version of the market game and explore the link with local rationalizability.
coordination, markets, rationalizability, stability
Journal of Economic Theory
CHATTERJI, Shurojit and GHOSAL, Sayantan.
Local coordination and market equilibria. (2004). Journal of Economic Theory. 114, (2), 255-279. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1889
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