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.

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