CandleFocus

Walrasian Market

The Walrasian market was created by French economist Leon Walras in the late 19th century. He understood it as a market where goods and services are exchanged and all sellers and buyers are given equal access. In a Walrasian market, it doesn't matter what the cost of goods is initially because a clearing price always exists and transaction imbalances between buyers and sellers can be addressed by setting prices above or below the equilibrium price. This is known as the Walrasian process of “tatonnement”, or trial and error pricing.

In this type of market, buyers and sellers submit their buying or selling price requests. These requests are then analyzed to obtain the equilibrium price which is then used to determine the market price that applies to all buyers and sellers. This is in contrast to an auction market in which the price is determined solely by the market forces of supply and demand.

In a Walrasian market, buyers and sellers have no real say on the final price of their transactions, as the price eventually converges to the equilibrium price. This differs from the auction market where buyers and sellers have more power in setting their own on the final prices of their transactions. This can make a Walrasian market more efficient in terms of pricing.

One example of the application of a Walrasian market is the New York Stock Exchange (NYSE). At the beginning of each trading day, the NYSE uses a trial and error process similar to the Walrasian process to set the opening prices for each security. This is done to ensure market efficiency and to promote orderly markets.

In conclusion, a Walrasian market is an efficient type of market where orders are batched and analyzed to determine a clearing price that will determine the market price. It was developed by Leon Walras to demonstrate the existence of a state of general equilibrium, where there is equal supply and demand at the same time in all markets. It differs from an auction market in which buyers and sellers have more control in setting their own prices, and is similar to the process used by the New York Stock Exchange at the beginning of each trading day.

Glossary Index