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LeChatelier-Samuelson principle in games and pass-through of shocks

Author

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  • Alexei Alexandrov

    (Consumer Financial Protection Bureau)

  • Özlem Bedre-Defolie

    (ESMT European School of Management and Technology)

Abstract

We show that the LeChatelier-Samuelson principle holds in many strategic environments: the adjustment to changes in parameters (shocks) in the short run (only by one player) is smaller in magnitude than the adjustment in the long run (allowing other players to adjust as well). We show that the principle holds for supermodular games (strategic complements) regardless of whether the shock directly affects only one player's action ("idiosyncratic" shock). The principle holds for submodular games (strategic substitutes) if the shock is idiosyncratic and there are only two players. We provide a simple sufficient condition for the principle to hold in submodular games with more than two players. The principle might fail to hold in submodular games if the shock is not idiosyncratic. We show that our findings explain the breakdown of the principle in non-strategic environments as well, apply our results to multiproduct monopoly and oligopoly cost pass-through, and argue that the principle might explain the empirical findings of overshifting of cost and tax changes.

Suggested Citation

  • Alexei Alexandrov & Özlem Bedre-Defolie, 2015. "LeChatelier-Samuelson principle in games and pass-through of shocks," ESMT Research Working Papers ESMT-15-03, ESMT European School of Management and Technology, revised 01 Mar 2016.
  • Handle: RePEc:esm:wpaper:esmt-15-03
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    Cited by:

    1. Takanori Adachi & Muhammad Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    2. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through and Welfare Measures under Imperfect Competition," Papers 1702.04967, arXiv.org, revised Dec 2018.
    3. Takanori ADACHI & Michal Fabinger, 2021. "Pass-Through and the Welfare Effects of Taxation under Imperfect Competition: A General Analysis," Discussion papers e-21-003, Graduate School of Economics , Kyoto University.
    4. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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