Applications of Core Theory to Market Exchange
Let a group of traders own stocks of certain goods that they may exchange among themselves in any mutually agreeable way. Assume that every trader seeks maximum gain by exchange. The result is a redistribution of the initial stock among that group of traders who can agree on the terms of trade. It is as if such traders form a coalition that allocates or imputes the goods to its members. The freedom to trade with anyone is the same as the freedom to join any coalition. Therefore, a trader will join that coalition offering him the best terms. The forming and the dissolving of coalitions is equivalent to contracting and recontracting. The process continues until no one can make himself better-off by trade. The resulting set of coalitions and the allocations they prescribe constitute the core of the market. Thus, the core of the market contains all possible competitive equilibria including the particular version familiar as the intersection of supply and demand schedules, the classical competitive equilibrium. The core is the outcome of a competitive process which does not always result in the classical competitive equilibrium.
KeywordsConsumer Surplus Reservation Price Competitive Equilibrium Indifference Curve Demand Schedule
Unable to display preview. Download preview PDF.