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  • Print publication year: 2011
  • Online publication date: June 2012

F - Bargaining and equilibrium: The core

Summary

One of the ideas presented repeatedly to students of economics is the link between large numbers of economic agents and competitive, price-taking, behavior. The notion is that in a large economy individual agents are strategically powerless and hence price-taking behavior makes sense. We can now give a formal proof of this argument. It is presented in Chapters 21 and 22. We define the core of a market economy as a generalization of the idea of the Edgeworth box. There will be many different kinds of traders and the usual N commodities. We will take a limit as the economy becomes large in a stylized fashion. The striking result is that the family of solutions to a bargaining problem corresponding to the contract curve in the Edgeworth box shrinks to the set of competitive allocations. In a large economy, strategic bargaining merely gets you to the competitive equilibrium. We will prove that, in a large economy, individual traders really do lack strategic power. Hence, competitive price taking is the appropriate model of behavior.

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