A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Ma, Jinpeng Working Paper Competitive Equilibrium with Indivisibilities Working Paper, No. 1998-09 Provided in Cooperation with: Department of Economics, Rutgers University Suggested Citation: Ma, Jinpeng (1998) : Competitive Equilibrium with Indivisibilities, Working Paper, No. 1998-09, Rutgers University, Department of Economics, New Brunswick, NJ This Version is available at: http://hdl.handle.net/10419/94341 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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We provide an alternative de nition of the coalitional form game to resolve this problem so that the balancedness of the new de ned game provides a useful necessary and sucient condition for the existence of comp etitive equilibrium for the original economy. We also observe that the nice strategy pro of prop erty of the minimum comp etitive price mechanism in the assignment problem and the Vickrey auction mo del do es not carry over to the ab ove economy.We show that examples of exchange economies exist for which no comp etitive price mechanism is individually coalitionally strategy pro of. JEL classi cation numb ers: D41, D44, D50 I thank Sushil Bikhchandani , Vince Crawford and editor Karl Shell for helpful comments and suggestions. I am grateful to an asso ciate editor for many fruitful comments that greatly improve the exp osition of the pap er. Of course, any remaining errors are mine. y Department of Economics, Rutgers University, Camden, NJ 08102, jinp [email protected] 1 1 Intro duction We consider an exchange economy with a nite numb er of agents. Each agent is initially endowed with a nite numb er of indivisible homogeneous or heterogeneous commo dities and may consume as many items as he wishes. An agent's utility function is a set function over the set of all commo dity bundles. This exchange economy is fairly broad. Some related examples of it include the exchange economy in Bikhchandani and Mamer [1] and Gul and Stacchetti [7], the assignment problem Ko opmans and Beckman [12], Shapley and Shubik [20] and the auction mo del in Vickrey 1 [21]. It is also analogous to the job-matching market in Kelso and Crawford [11] . 2 It is known that the assignment problem has a comp etitive equilibrium. Indeed Shapley and Shubik [20] de ned a market game for the assignment problem and showed that the market game is totally balanced and thus has a nonempty core. It follows from the core equivalence theorem that a comp etitive equilibrium exists in the assignment problem. This existence result dep ends on the assumption that each buyer consumes at most one unit. If buyers can consume as many as they wish, then a comp etitive equilibrium may not exist; see Bikhchandani and Mamer [1], Kelso and Crawford [11] and Section 3 for examples. This motivates a natural question: Under what circumstance do es a comp etitive equilibrium exist under the general situation? Kelso and Crawford [11] studied a job-matching market and discovered that if rm's utility function satis es their gross substitutes condition, their matching mo del has a nonempty core and thus has a comp etitive equilibrium since a core matching is also comp etitive Kelso and Crawford [11, pp.1487 & 1502]. Bikhchandani and Mamer [1] used a di erent approach and obtained a necessary and sucient condition for the existence of comp etitive equilibrium. In their approach, they designed two linear programmings and showed that a comp etitive equilibrium exists if and only if the two linear programmings have solutions in common. Lately, Gul and Stacchetti [7] found two new sucient conditions, the no complementarities and the single improvement prop erty, on buyer's utility function for the existence of comp etitive equilibrium. They showed that their two new conditions are equivalent to the gross substitutes condition in Kelso and Crawford [11] and then invoked the nonempty core theorem in Kelso and Crawford [11] to obtain their existence theorem. This pap er uses the core approach in Shapley and Shubik [20] to study the same existence issue. We use the economy to generate a coalitional form game and wanttoshow that the balancedness of the game provides a useful necessary and sucient condition for the existence. Typically the numb er of players in a coalitional form game generated by an economy is the same as the number 1 But it should b e aware that a worker's utility function in Kelso and Crawford [11] is more complicated and it dep ends on not only the received salary but also the name of a rm with whom he is matched. This is quite di erent from the exchange economy of this pap er in which agents are not concerned with the names of the owners of the commo dities. 2 Gale [5], Kaneko [8,9], Kaneko and Yamamoto [10] and Quinzii [15] obtained several existence theorems for quite general situations with indivisi bl e go o ds. 2 of agents in the economy. But we observe that when the coalitional form game is generated in this standard manner, its core do es not coincide with the set of comp etitivepayo s and the balancedness do es not provide sucient information on the existence of comp etitive equilibrium for the original economy; as shown in Example 1. To resolve the problem, we provide an alternativeway to generate a coalitional form game. The approach is as follows. Supp ose that an economy has one agent i with no indivisible commo dities and one agent j with two indivisible commo dities, 1 and 2. Given such an economy,we consider a bilateral exchange economy with four \agents", i; j; 1 and 2, such that agents i and j have the same utility functions as they do in the original economy but b oth haveno indivisible commo dities even though agent j owns two commo dities in the original economy, and commo dity \agents" 1 and 2 have zero utility functions but own commo dities 1 and 2 resp ectively. Then we use this bilateral exchange economy to generate a coalitional form game for the original exchange economy. It follows from the argument made in Kelso and Crawford [11, pp.1487 & 1502] that the core equivalence theorem holds for this bilateral exchange economy, i.e., the core of the coalitional form game coincides with the set of comp etitive equilibrium payo s. Our observation is that a comp etitive equilibrium exists in the bilateral exchange economy if and only if it exists in the original exchange economy. Therefore a comp etitive equilibrium in the original economy exists if and only if the generated game on fi; j; 1; 2g is balanced, since the balancedness of the game is the necessary and sucient condition for it to have a nonempty core Bondareva [2], Shapley [18]. The ab ove idea is in fact not completely new and it has b een implicitly used in Kelso and Crawford [11] b efore. In their one-sided \matching" market, they start with the coalitional form game and construct a job-matching market by adding dummy buyers, each with an identical utility function. Here we consider an exchange economy with heterogeneous utility functions and construct a bilateral exchange economy to generate a game by adding dummy commo dity sellers. This approach is quite useful b ecause it delivers information on existence or nonexistence of a comp etitive equilibrium at the same time. Moreover, we can say exactly what are the comp etitive prices in the original exchange economy. They are nothing but the core payo s of the coalitional form game \received" by those commo dity \sellers". Our second concern is the incentive asp ects of comp etitive price mechanisms. A mechanism is individually coalitionally strategy pro of if it is always the b est for each agent each agentin each coalition to reveal his true information. It is well-known that the minimum comp etitive price mechanism in the auction mo del in Vickrey [21] exists and it is individually strategy pro of. Demange [3] and Leonard [13] studied the assignment problem and indep endently showed that the minimum comp etitive price mechanism is individually strategy pro of. Demange and Gale [6] studied a generalized assignment problem and showed that the minimum comp etitive price mechanism exists and it is individually strategy pro of as well.