Louis Makowski

Vickrey-Clarke-Groves mechanisms and perfect competition

Abstract We present a game theoretic-mechanism characterization of perfect competition: we prove the perfectly competitive mechanism is the only Pareto optimal, individually rational, dominant strategy allocation mechanism. Thus, perfect competition is uniquely capable of efficiently and non-coercively solving the incentive/bargaining problem when there is incomplete information, i.e., when each individual knows his own tastes and production possibilities better than anyone else. We also show one can interpret any dominant strategy, demand-revealing mechanism as “working” because it mimics the reward scheme that characterizes the perfectly competitive market, namely, the marginal product reward scheme.

Vickrey-Clarke-Groves mechanisms in continuum economies: Characterization and existence

Abstract The equivalence in the finite agent model between the families of efficient dominant strategy and Vickrey-Clarke-Groves mechanisms is extended to continuum economies. The concept of an individuals marginal product is used to link the two families of mechanisms when agents are non-atomic. Unlike the finite agent model, feasible and efficient dominant strategy mechanisms exist in the continuum, but these mechanisms do not guarantee individual rationality. For individual rationality to hold, the environment must also satisfy full-appropriation : each individual receives a payoff exactly equal to his/her marginal product. Full-appropriation is shown to be equivalent to the condition that each individual fully internalizes any external effects he/she creates. Environments and examples are given that exhibit or fail to exhibit full-appropriation.