Arrow–Debreu exchange market

Not to be confused with Exchange (organized market).

In theoretical economics, an Arrow–Debreu exchange market is a special case of the Arrow–Debreu model in which there is no production - there is only an exchange of already-existing goods. An Arrow–Debreu exchange market has the following ingredients:

• A set of $m$ divisible products.
• A set of $n$ agents.
• Each agent $i=1,\dots ,n$, has an endowment $e_{i}$, which is a set of products.

Each product $j$ has a price $p_{j}$; the prices are determined by methods described below. The price of a bundle of products is the sum of the prices of the products in the bundle. A bundle is represented by a vector $x=x_{1},\dots ,x_{m}$, where $x_{j}$ is the quantity of product $j$. So the price of a bundle $x$ is $p\cdot x=\sum _{j=1}^{m}p_{j}\cdot x_{j}$.

Given a price-vector, the budget of an agent is the total price of his endowment, $p\cdot e_{i}$.

A bundle is affordable for a buyer if the price of that bundle is at most the buyer's budget. I.e, a bundle $x$ is affordable for buyer $i$ if $p\cdot x\leq p\cdot e_{i}$.

Each buyer has a preference relation over bundles, which can be represented by a utility function. The utility function of buyer $i$ is denoted by $u_{i}$. The demand set of a buyer is the set of affordable bundles that maximize the buyer's utility among all affordable bundles, i.e.:

${\text{Demand}}_{i}(p):=\arg \max _{p\cdot x\leq p\cdot e_{i}}u_{i}(x)$.

A competitive equilibrium (CE) is a price-vector $p_{1},\dots ,p_{m}$in which it is possible to allocate, to each agent, a bundle from his demand-set, such that the total allocation exactly equals the supply of products. The corresponding prices are called market-clearing prices. A CE always exists, even in the more general Arrow–Debreu model. The main challenge is to find a CE.

Computing an equilibrium

Approximate CE

Kakade, Kearns and Ortiz gave algorithms for approximate CE in a generalized Arrow-Debreu market in which agents are located on a graph and trade may occur only between neighboring agents. They considered non-linear utilities.

Exact CE

Jain presented the first polynomial-time algorithm for computing an exact CE when all agents have linear utilities. His algorithm is based on solving a convex program using the ellipsoid method and simultaneous diophantine approximation. He also proved that the set of assignments at equilibrium is convex, and the equilibrium prices themselves are log-convex.

Based on Jain's algorithm, Ye developed a more practical interior-point method for finding a CE.

Devanur and Kannan gave algorithms for exchange markets with concave utility functions, where all resources are goods (the utilities are positive):

• When the utilities are SPLC (Separable Piecewise-Linear Concave) and either n or m is a constant, their algorithm is polynomial in the other parameter. The technique is decomposing the space of possible prices into cells using a constant number of hyperplanes, so that in each cell, each buyer’s threshold marginal utility is known. When both n and m are variable, it was left open whether a polytime algorithm exists. Later, Chen, Dai, Du and Teng proved that, with SPLC utilities, computing a CE is PPAD-hard. Their proof shows also that this market-equilibrium problem does not have an FPTAS unless PPAD is contained in P.
• When the utilities are PLC (Piecewise-Linear Concave, but not necessarily separable) and m is constant, their algorithm is polynomial in n. But when both m and n are variable, finding a CE is PPAD-hard even for Leontief utilities, which are a special case of PLC utilities (when n is constant but m is variable, it was left open whether a polytime algorithm exists).

Codenotti, McCune, Penumatcha and Varadarajan gave an algorithm for Arrow-Debreu markes with CES utilities where the elasticity of substitution is at least 1/2.

Chaudhury, Garg, McGlaughlin and Mehta prove that, when the products are bads, computing an equilibrium is PPAD-hard even when utilities are linear, and even under a certain condition that guarantees CE existence.

CE for markets with production

Newman and Primak studied two variants of the ellipsoid method for finding an approximate CE in an Arrow-Debreu market with production, when all agents have linear utilities. They proved that the inscribed ellipsoid method is more computationally efficient than the circumscribed ellipsoid method.

Related models

A Fisher market is a simpler market in which agents are only buyers - not sellers. Each agent comes with a pre-specified budget, and can use it to buy goods at the given price.

In a Fisher market, increasing prices always decreases the agents' demand, as they can buy less with their fixed budget. However, in an Arrow-Debreu exchange market, increasing prices also increases the agents' budgets, which means that the demand is not a monotone function of the prices. This makes computing a CE in an Arrow-Debreu exchange market much more challenging.