Existence of market equilibrium

A market does not always achieve an equilibrium. Consider the following TPM:
0 1 0
𝑃𝑃 = �0.5 0 0.5�.
0 1 0
Then
0.5 0 0.5
(2𝑘𝑘)
𝑃𝑃 =� 0 1 0 �
0.5 0 0.5
and
0 1 0
(2𝑘𝑘+1)
𝑃𝑃 = �0.5 0 0.5�
0 1 0
where 𝑘𝑘 is a positive integer. A market that follows this model, does not reach an
equilibrium.

Classification of states
Accessible: State 𝑗𝑗 is accessible from state 𝑖𝑖 if for some 𝑛𝑛 ≥ 0 we have
(𝑛𝑛)
𝑝𝑝𝑖𝑖𝑖𝑖 > 0

We then write, 𝑖𝑖 → 𝑗𝑗.

Properties:
(0)
1. 𝑖𝑖 → 𝑖𝑖 (since 𝑝𝑝𝑖𝑖𝑖𝑖 = 1).
2. If 𝑖𝑖 → 𝑗𝑗 and 𝑗𝑗 → 𝑘𝑘, then 𝑖𝑖 → 𝑘𝑘.
Exercise:
0 1 0
�0.5 0 0.5�
0 1 0
Is 1 → 3?
Solution:
1 → 2 and 2 → 3. Therefore, 1 → 3.

16
Communicating:
States 𝑖𝑖 and 𝑗𝑗 communicate if 𝑖𝑖 → 𝑗𝑗 and 𝑗𝑗 → 𝑖𝑖. We then write 𝑖𝑖 ↔ 𝑗𝑗.
Properties
(0)
Reflexivity: 𝑖𝑖 ↔ 𝑖𝑖 (since 𝑝𝑝𝑖𝑖𝑖𝑖 = 1).
Symmetry: If 𝑖𝑖 ↔ 𝑗𝑗, then 𝑗𝑗 ↔ 𝑖𝑖.
Transitivity: If 𝑖𝑖 ↔ 𝑗𝑗 and 𝑗𝑗 ↔ 𝑘𝑘, then 𝑖𝑖 ↔ 𝑘𝑘.
Exercise:
0 1 0
�0.5 0 0.5�
0 1 0
Is 1 ↔ 3?
Solution:
1 → 2 and 2 → 3. Therefore, 1 → 3. Similarly, 3 → 1. Therefore, 1 ↔ 3.
Communicating class
(Equivalence class)
A set of all states that communicate with each other is called an equivalence class.
A communicating class is closed if the process cannot leave the class. That is, a class
𝐶𝐶 is closed if 𝑖𝑖 ∈ 𝐶𝐶 and 𝑗𝑗 ∉ 𝐶𝐶 implies 𝑖𝑖 ↛ 𝑗𝑗.
Irreducible Markov Chain
A Markov Chain is called irreducible if all its states belong to one equivalence
class. Otherwise, it is called reducible.
Exercise:
1 2 3 4
1 0.2 0.3 0.4 0.1
2 0.3 0.3 0.3 0.1
� �
3 0.1 0.2 0.2 0.5
4 0 0 0 1
Is the M.C. irreducible?

17
Solution:
Here, 1 ↔ 2 ↔ 3. Though 4 is accessible from these states, none of these states is
accessible from 4. Therefore, the M.C. is reducible.
[In fact, 4 is an absorbing state. Once the process is in state 4, it cannot leave 4.]
Exercise:
1 2 3 4
1 0.4 0 0.3 0.3
2 0.5 0.2 0.3 0
� �
3 0.2 0.2 0.4 0.2
4 0.3 0.3 0.3 0.1
Is the M.C. irreducible?
Solution:
Here, 1 ↔ 2, 2 ↔ 3 and 3 ↔ 4. Thus, 1 ↔ 2 ↔ 3 ↔ 4. Therefore, the M.C. is
irreducible.
Periodic state
A state i is said to be periodic with period d if d is the largest integer such that
(𝑛𝑛)
𝑝𝑝𝑖𝑖𝑖𝑖 > 0 ⇒ 𝑛𝑛 is a multiple of 𝑑𝑑.
Example:
0 1 0
�0 0 1�
1 0 0
Is the chain irreducible? Determine the period of state 1.
Solution:
Here, 1 ↔ 2 ↔ 3. Therefore, the chain is irreducible. The set of integers 𝑛𝑛 for which
(𝑛𝑛)
𝑝𝑝11 > 0 is {3, 6, 9, ⋯ }. Therefore, 𝑑𝑑 = 3.
Theorem
If 𝑖𝑖 ↔ 𝑗𝑗, then 𝑖𝑖 and 𝑗𝑗 have the same period.
Example:
In the above example, all the states are communicating. So, each state has period 3.
18