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

Emanuela Randon () and P Simmons

Discussion Papers from Department of Economics, University of York

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

Keywords: Externalities; Strategic Interaction; Stability (search for similar items in EconPapers)
JEL-codes: C72 D50 D62 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-mic
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.york.ac.uk/media/economics/documents/discussionpapers/2008/0815.pdf Main text (application/pdf)

Related works:
Journal Article: Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability? (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:08/15

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().