Abstract
This chapter describes market adjustment with adaptive supply and pricing decisions. An unsolved problem in microeconomic theory is the explanation of how market prices are adjusted by participating economic agents so as to move the market toward an equilibrium. Dissatisfaction with tâtonnement processes that use an outside auctioneer has led to several attempts to incorporate the participating agents explicitly into the price setting process. The chapter also describes a market adjustment mechanism, based on the work of Mirman and Porter, which evolves out of the interaction of the adaptive behavior of agents on both sides of the market. The market analyzed is a labor market where: (1) there is imperfect knowledge about wages and wage-supply relationships; (2) decisions by agents are made independently and are based on accurate but partial information which has been acquired; (3) employment contracts are for only one period in length and are made at the beginning of each period, (4) firms are price-setters only and workers are price-takers only.
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