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Constrained Suboptimality When Prices are Non-Competitive

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  • Herings, P.J.J.
  • Konovalov, A.

    (Tilburg University, Center for Economic Research)

Abstract

The paper addresses the following question: how efficient is the market system in allocating resources if trade takes place at prices that are not necessarily competitive?Even though there are many partial answers to this question, an answer that stands comparison to the rigor by which the first and second welfare theorems are derived is lacking.We first prove a "Folk Theorem" on the generic suboptimality of equilibria at non-competitive prices.The more interesting problem is whether equilibria are constrained optimal, i.e. efficient relative to all allocations that are consistent with prices at which trade takes place.We give a necessary condition, called the separating property, for constrained optimality: each constrained household should be constrained on each constrained market.If the number of commodities is less than or equal to two, then this necessary condition is also sufficient.In that case equilibria are constrained optimal.In all other cases, this necessary condition is typically not sufficient and equilibria are generically constrained suboptimal.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-114.

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Date of creation: 2000
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Handle: RePEc:dgr:kubcen:2000114

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Keywords: prices; welfare; competition;

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References

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  1. Maskin, Eric S. & Tirole, Jean, 1984. "On the efficiency of fixed price equilibrium," Journal of Economic Theory, Elsevier, vol. 32(2), pages 317-327, April.
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  14. CITANNA, Alessandro & CRES, Herve & DREZE, Jacques & HERINGS, Jean-Jacques & VILLANACCI, Antonio, 2001. "Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices," Les Cahiers de Recherche 732, HEC Paris.
  15. P. Jean-Jacques Herings, 1997. "Endogenously determined price rigidities (*)," Economic Theory, Springer, vol. 9(3), pages 471-498.
  16. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
  17. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June.
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Cited by:
  1. Gerard van der Laan & Zaifu Yang, 2011. "An Ascending Multi-Item Auction with Financially Constrained Bidders," Discussion Papers 11/04, Department of Economics, University of York.
  2. Zaifu Yang & Dongmo Zhang, 2013. "On a Fundamental Property of Talman-Yang's Auction under Price Control," Discussion Papers 13/06, Department of Economics, University of York.
  3. Andersson , Tommy & Yang , Zaifu & Zhang , Dongmo, 2014. "How to Efficiently Allocate Houses under Price Controls?," Working Papers 2014:24, Lund University, Department of Economics.

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