In economic theory, a strategic market game, also known as a market game, is a game explaining

price formation Market microstructure is a branch of finance concerned with the details of how exchange occurs in market (economics), markets. While the theory of market microstructure applies to the exchange of real or financial assets, more evidence is available ...

through

game theory Game theory is the study of mathematical models of strategic interactions. It has applications in many fields of social science, and is used extensively in economics, logic, systems science and computer science. Initially, game theory addressed ...

, typically implementing a

general equilibrium In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ov ...

outcome as a

Nash equilibrium In game theory, the Nash equilibrium is the most commonly used solution concept for non-cooperative games. A Nash equilibrium is a situation where no player could gain by changing their own strategy (holding all other players' strategies fixed) ...

. Fundamentally in a strategic market game, markets work in a strategic way that does not (directly) involve price but can indirectly influence it. The key ingredients to modelling strategic market games are the definition of trading posts (or markets), and their price formation mechanisms as a function of the actions of players. A leading example is the

Lloyd Shapley Lloyd Stowell Shapley (; June 2, 1923 – March 12, 2016) was an American mathematician and Nobel Memorial Prize-winning economist. He contributed to the fields of mathematical economics and especially game theory. Shapley is generally conside ...

and

Martin Shubik Martin Shubik (1926–2018) was an American mathematical economist who specialized in game theory, defense analysis, and the theory of money. The latter was his main research interest and he referred to it as his "white whale". He also coined th ...

trading post game. Shapley-Shubik use a numeraire and trading posts for the exchange of goods. The relative price of each good in terms of the numeraire is determined as the ratio of the amount of the numeraire brought at each post, to the quantity of goods offered for sale at that post. In this way, every agent is allocated goods in proportion to his bids, so that posts always clear.

Pradeep Dubey Pradeep Dubey (born 9 January 1951) is an Indian game theorist. He is a Professor of Economics at the State University of New York, Stony Brook, and a member of the Stony Brook Center for Game Theory. He also holds a visiting position at Cowl ...

and

John Geanakoplos John Geanakoplos (born March 18, 1955) is an American economist, and the James Tobin Professor of Economics at Yale University. Background and education John Geanakoplos was born to a Greek-American family of scholars. His father was the late pr ...

show that such a game can be a strategic foundation of the Walras equilibrium. A key ingredient of such approaches is to have very large numbers of players, such that for each player the action appears to him as a linear constraint that he cannot influence. An excellent description of price formation in a strategic market game in which for each commodity there is a unique trading post, on which consumers place offers of the commodity and bids of inside money, is provided by James Peck, Karl Shell and Stephen Spear.

References

Business models Game theory game classes {{econ-theory-stub