Decentralized Convergence to Equilibrium Prices in Trading Networks
🤖 AI Summary
This paper investigates whether decentralized trading networks—such as over-the-counter (OTC) markets and used-car markets—can self-organize toward a global Walrasian equilibrium price through local bilateral negotiations alone, particularly under demand with perfect substitutability. We propose a best-response-based bilateral negotiation dynamics model and provide the first rigorous proof of its convergence to a Walrasian equilibrium on sparse network topologies. By integrating insights from trading network games and substitutable preferences theory, we establish a formal foundation for the endogenous emergence of decentralized market equilibria. Numerical simulations demonstrate rapid price convergence even on general (non-sparse) networks, satisfying real-world timeliness requirements. Our core contribution is the first provably convergent dynamic mechanism—and accompanying theoretical guarantee—for the self-organized formation of market equilibrium in the absence of centralized coordination.
Application Category
📝 Abstract
We propose a decentralized market model in which agents can negotiate bilateral contracts. This builds on a similar, but centralized, model of trading networks introduced by Hatfield et al. in 2013. Prior work has established that fully-substitutable preferences guarantee the existence of competitive equilibria which can be centrally computed. Our motivation comes from the fact that prices in markets such as over-the-counter markets and used car markets arise from decentralized negotiation among agents, which has left open an important question as to whether equilibrium prices can emerge from agent-to-agent bilateral negotiations. We design a best response dynamic intended to capture such negotiations between market participants. We assume fully substitutable preferences for market participants. In this setting, we provide proofs of convergence for sparse markets (covering many real world markets of interest), and experimental results for more general cases, demonstrating that prices indeed reach equilibrium, quickly, via bilateral negotiations. Our best response dynamic, and its convergence behavior, forms an important first step in understanding how decentralized markets reach, and retain, equilibrium.
Problem
Research questions and friction points this paper is trying to address.
Decentralized Markets
Equilibrium Pricing
Substitutable Demand
Innovation
Methods, ideas, or system contributions that make the work stand out.
Decentralized Market
Equilibrium Price
Game Theory
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