A Simple and Efficient Algorithm for Computing Market Equilibria

Abstract

We give a new mathematical formulation of market equilibria in exchange economies using an indirect utility function : the function of prices and income that gives the maximum utility achievable. The formulation is a convex program and can be solved when the indirect utility function is convex in prices. We illustrate that many economies, including: —Homogeneous utilities of degree α ∈ [0, 1] in Fisher economies—this includes Linear, Leontief, Cobb-Douglas — Resource allocation utilities like multi-commodity flows satisfy this condition and can be efficiently solved. Further, we give a natural tâtonnement type price-adjusting algorithm in these economies. Our algorithm, which is applicable to a larger class of utility functions than previously known weak gross substitutes , mimics the natural dynamics for the markets as suggested by Walras: it iteratively adjusts a good’s price upward when the demand for that good under current prices exceeds its supply; and downward when its supply exceeds its demand. The algorithm computes an approximate equilibrium in a number of iterations that is independent of the number of traders and is almost linear in the number of goods.