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Strategy-proofness and Markets

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  • Mark A. Satterthwaite

Abstract

If a market is considered to be a social choice function, then the domain of admissible preferences is restricted and standard social choice theorems do not apply. A substantial body of analysis, however, strongly supports the notion that attractive strategy-proof social choice functions do not exist in market settings. Yetprice theory, which implicityly assumes the strategy-proofness of markets, performs quie well in describing many real markets. This paper resolves this paradox in two steps. First, given that a market is not strategy-proof, it should be modeled as a Bayesian game of incomplete information. Second, a double auction market, which is perhaps the simplest operationalization of supply and demand as a Bayesian game, is approximately strategy-proof even when the number of traders on each side of the market is quite moderate.

Suggested Citation

  • Mark A. Satterthwaite, 1999. "Strategy-proofness and Markets," Discussion Papers 1255, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1255
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    References listed on IDEAS

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