Strategic Market Game Models of Exchange Economies

Abstract

The general equilibrium model of exchange and production is not a process model. There is no indication as to how prices are formed. This chapter presents the list of several limitations of the general equilibrium model. A remodelling of the economy has been suggested as a game in strategic form offers a way to construct a class of process models that among their useful properties cast light upon the role of money and credit mechanisms in an economy. It is both clear and strikingly counterintuitive that money and credit mechanisms play no role in general equilibrium theory. Even casual empiricism is sufficient to indicate that prices are formed in many ways in different parts of an economy. Retail markets often have the merchants setting the offer price, adjusting it as customers come and go. Other sales involve bilateral bargaining. In other instances, price may be set by a variety of auction mechanisms. A literature now exists in economic theory studying price formation through a mixture of search and bargaining by many pairs of traders. The model building approach adopted is that it does not matter too much what price formation mechanism is chosen to remodel the general equilibrium model as a well defined game in extensive or strategic form. Finally, tThe chapter also discusses a sequence of models of exchange using single commodity money.