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The Stability of Virtual Equilibrium

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  • Selim, Tarek

Abstract

The impact of information technology (IT) on the stability of market equilibrium is explained from a simple microeconomic standpoint. Attributes of a dynamically stable “virtual” market equilibrium are described assuming consumer rationality, an elastic supply curve, and minimum static market demand. Three conditions are necessary for long-run price stability of such a “virtual” equilibrium: (1) firm-specific strategic effects have to be completely offset by aggregate demand growth effects, (2) market equilibrium must arise under the constraint of demand sustainability, and (3) consumer indirect utility gains from information availability must exceed their respective disutility from locational search costs. Those conditions stem from more elastic supply together with less elastic demand compared to when IT is not utilized.

Suggested Citation

  • Selim, Tarek, 2004. "The Stability of Virtual Equilibrium," MPRA Paper 119501, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119501
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    References listed on IDEAS

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    1. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," NBER Working Papers 6849, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    information technology; virtual market; equilibrium stability; consumer rationality; elastic supply; strategic effects; growth effects;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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