Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability?
AbstractGenerally, two facts occur with strategic complementarities and fixed prices: i) the equilibria are multiple, and ii) if the complementarities are strong, the law of demand is violated and the equilibrium is unstable. In this paper, we analyse the effect of price flexibility on these features as well as on market welfare properties. Assuming an exchange economy with H agents consuming two goods with one strategic complement, we show that flexibility of prices may remove both the multiplicity of the equilibria and the instability of behaviour when the externalities are strong. The equilibrium with beneficial externality is shown to be Pareto optimal while the equilibrium with detrimental externality requires corrections
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 08/15.
Date of creation: Jul 2008
Date of revision:
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Externalities; Strategic Interaction; Stability;
Other versions of this item:
- Emanuela Randon & Peter Simmons, 2010. "Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(2), pages 249-279, 04.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
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