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Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability?

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Abstract

Generally, 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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  • E Randon & P Simmons, 2008. "Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability?," Discussion Papers 08/15, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:08/15
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    1. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-1093, Nov.-Dec..
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    4. David Yeung, 2002. "Consumption externalities and upward-sloping demand," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 8(3), pages 196-200, August.
    5. Peter A. Diamond & James A. Mirrlees, 1973. "Aggregate Production with Consumption Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(1), pages 1-24.
    6. Cornes, Richard & Homma, Masaaki, 1979. "Consumption externalities and stability," Economics Letters, Elsevier, vol. 4(4), pages 301-306.
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    More about this item

    Keywords

    Externalities; Strategic Interaction; Stability;
    All these keywords.

    JEL classification:

    • 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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