Graphical exchange mechanisms

Abstract: Consider an exchange mechanism which accepts diversified offers of various commodities and redistributes everything it receives. We impose certain conditions of fairness and convenience on such a mechanism and show that it admits unique prices, which equalize the value of offers and returns for each individual. We next define the complexity of a mechanism in terms of certain integers

a u_{i j}, p i_{i j}

and

k_{i}

that represent the time required to exchange

i

for

j

, the difficulty in determining the exchange ratio, and the dimension of the message space. We show that there are a finite number of minimally complex mechanisms, in each of which all trade is conducted through markets for commodity pairs. Finally we consider minimal mechanisms with smallest worst-case complexities

a u = m a x a u_{i j}

and

p i = m a x p i_{i j}

. For

m > 3

commodities, there are precisely three such mechanisms, one of which has a distinguished commodity -- the money -- that serves as the sole medium of exchange. As

m i g h t a r r o w i n f t y

the money mechanism is the only one with bounded

l e f t (p i, a u i g h t)

.

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