What is a Walrasian Market?
A Walrasian Market is an economic model of a market process in which orders are collected into batches of buys and sells and then analyzed to determine a clearing price that will decide the market price. This is also referred to as a call market.
- A Walrasian market is one in which orders are batched and analyzed to determine a clearing price that will determine the market price.
- Buyers and sellers do not have much say on final prices of their trades in a Walrasian market unlike auction markets, where market forces are at work.
Understanding Walrasian Market
The Walrasian market was developed by Leon Walras. He developed the concept for a Walrasian market in response to a problem by French philosopher and mathematician Antoine Cournot. Cournot posited that it was not possible to demonstrate a state of general equilibrium in which there was equal supply and demand at the same time in all markets.
The Walrasian market model is used regularly in the financial markets. The New York Stock Exchange (NYSE) uses a similar process before the opening bell to determine opening prices. A specialist looks at all the collected orders for a particular security and selects the price that will clear the greatest number of trades. In fact, up until 1871 all trading on the New York Stock Exchange was executed in this fashion.
Within a Walrasian market, buy and sell orders are grouped together and then carried out at specific times instead of executed one by one continuously. A Walrasian auctioneer gathers prices about orders and determines the final price. He is expected to function in a market with complete and perfect information about orders.
Walrasian Market Compared to an Auction Market
A Walrasian market differs from an auction market, in which buyers and sellers trade continuously. In auction markets, market forces determine the final price more directly, whereas the buyers and sellers in a Walrasian market do not have the last say on what the final price is in their trades.
In an auction market, buyers enter competitive bids and sellers enter competitive offers simultaneously. The price at which a stock is traded is a representation of the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept. Matching bids and offers are then paired together and the orders are completed. Walrasian markets can be more helpful in markets where there are few buyers, sellers, and shares to trade.
Example of Walrasian Market
For example, say these are the buy orders for Company A’s stock:
Buy 1,000 shares at $5.25
Buy 500 shares at $5.00
Buy 700 shares at $5.50
Buy 500 shares at $5.25
Sell 1,000 shares at $5.25
Sell 500 shares at $5.00
Sell 700 shares at $5.50
Sell 500 shares at $5.25
In a Walrasian market, the buy orders are grouped together and executed at a price and time that will clear most of those orders. In this case, that price might be $5.25. Even though some of the parties are willing to buy or sell for $5.00, the price that clears most of the transactions is $5.25, and in a Walrasian market, that is the price at which the exchange's market analyst executes these trades in.