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An Industry-Equilibrium Analysis of the LeChatelier Principle

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  • Peter Arendorf Bache

    () (Department of Economics and Business, Aarhus University)

  • Anders Laugesen

    () (Department of Economics and Business, Aarhus University)

Abstract

By considering firms operating in a perfectly- or monopolisticallycompetitive industry with free entry, we show that well-established results on the celebrated LeChatelier principle (LCP) do not extend into an endogenous competitive environment. For instance, labour demand may be more elastic in the short run (where capital is fixed) than in the long run even if capital and labour are either complements or substitutes in profits. This may also be true locally at a point of long-run equilibrium. A novel insight is that industry-equilibrium effects introduce an asymmetry such that the LCP may hold for wage increases but not for wage decreases. These results are important for the interpretation of estimated labour-demand elasticities. Finally, we show that the LCP may hold for the total industry labour demand in situations where it does not hold for the labour demand of individual firms.

Suggested Citation

  • Peter Arendorf Bache & Anders Laugesen, 2013. "An Industry-Equilibrium Analysis of the LeChatelier Principle," Economics Working Papers 2013-16, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2013-16
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    References listed on IDEAS

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    1. de Meza, David, 1981. ""Perverse" Long-run and Short-run Factor Demand Curves," Economica, London School of Economics and Political Science, vol. 48(191), pages 299-303, August.
    2. Roberts, Kevin, 1999. "Rationality and the LeChatelier Principle," Journal of Economic Theory, Elsevier, vol. 87(2), pages 416-428, August.
    3. Milgrom, Paul & Roberts, John, 1996. "The LeChatelier Principle," American Economic Review, American Economic Association, vol. 86(1), pages 173-179, March.
    4. Koebel, Bertrand M. & Laisney, François, 2010. "The aggregate Le Chatelier Samuelson principle with Cournot competition," ZEW Discussion Papers 10-009, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. John K.-H Quah, 2007. "The Comparative Statics of Constrained Optimization Problems," Econometrica, Econometric Society, vol. 75(2), pages 401-431, March.
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    More about this item

    Keywords

    Complements; Substitutes; Monopolistic Competition; Industry Equilibrium; Labour Demand; LeChatelier Principle;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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