Edgeworth paradox: Difference between revisions
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To solve the [[Bertrand paradox]], the [[Irish]] economist [[Francis Ysidro Edgeworth]] put forward the '''Edgeworth Paradox''' in his paper "The Pure Theory of Monopoly", published in 1897.<ref>{{cite book |last1=Edgeworth |first1=Francis Ysidro |title=Papers relating to political economy |date=1925 |publisher=Royal economic society by Macmillan and Company, limited |url=http://gallica.bnf.fr/scripts/ConsultationTout.exe?O=n024378}}</ref> |
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In [[economics]], the '''Edgeworth paradox''' describes a situation in which two players cannot reach a state of [[Economic equilibrium|equilibrium]] with pure strategies, i.e. each charging a stable price. |
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In [[economics]], the '''Edgeworth paradox''' describes a situation in which two players cannot reach a state of [[Economic equilibrium|equilibrium]] with pure strategies, i.e. each charging a stable price. A fact of '''Edgeworth-Paradox''' is that in some cases, even if the direct price impact is negative and exceeds the conditions, an increase in cost proportional to the quantity of an item provided may cause a decrease in all optimal prices.<ref>{{cite journal |last1=Selten |first1=Reinhard |title=Das Edgeworth-Paradox |journal=Preispolitik der Mehrproduktenunternehmung in der statischen Theorie |date=1970 |volume=16 |pages=71–85 |doi=10.1007/978-3-642-48888-7_6}}</ref> Due to the limited production capacity of enterprises in reality, if only one enterprise's total production capacity can be supplied cannot meet social demand, another enterprise can charge a price that exceeds the marginal cost for the residual social need.<ref>{{cite book |last1=Edgeworth |first1=Francis Ysidro |title=Papers relating to political economy |date=1925 |publisher=Royal economic society by Macmillan and Company, limited |url=http://gallica.bnf.fr/scripts/ConsultationTout.exe?O=n024378}}</ref> |
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| ⚫ | Suppose two companies, A and B, sell an identical commodity product, and that customers choose the product solely on the basis of price. Each company faces capacity constraints, in that on its own it cannot satisfy demand at its zero-profit price, but together they can more than satisfy such demand. |
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| ⚫ | Suppose two companies, A and B, sell an identical commodity product, and that customers choose the product solely on the basis of price. Each company faces capacity constraints, in that on its own it cannot satisfy demand at its zero-profit price, but together they can more than satisfy such demand. |
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| ⚫ | Unlike the |
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'''Edgeworth Pardox''' assumption of the [[Cournot model]] as follows: |
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1. The production capacity of the two manufacturers is limited. Under a certain price level, the output of a particular [[Oligopoly]] cannot meet the market demand at this price level so that another manufacturer can obtain the residual market demand. |
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2. In a certain period, two prices can exist in the market at the same time. |
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3. When a particular [[Oligopoly]] chooses a certain price level, another [[Oligopoly]] will not immediately respond to the price.<ref>{{cite book |last1=Edgeworth |first1=Francis Ysidro |title=Papers relating to political economy |date=1925 |publisher=Royal economic society by Macmillan and Company, limited |url=http://gallica.bnf.fr/scripts/ConsultationTout.exe?O=n024378}}</ref> |
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The Edgeworth model shows that the oligopoly price fluctuates between the [[Perfect competition]] market price and the perfect [[monopoly]] price, and there is no stable equilibrium.<ref>{{cite journal |last1=Xavier |first1=Vives |title=Edgeworth and modern oligopoly theory |journal=European Economic Review |date=1 April 1993 |volume=37 |issue=2-3 |pages=463–476 |doi=10.1016/0014-2921(93)90035-9}}</ref> |
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| ⚫ | Unlike the[[Bertrand paradox (economics)|Bertrand paradox]], the situation of both companies charging zero-profit prices is not an equilibrium, since either company can raise its price and generate profits. Nor is the situation where one company charges less than the other an equilibrium, since the lower price company can profitably raise its price towards the higher price company's price. Nor is the situation where both companies charge the same positive-profit price, since either company can then lower its price marginally and profitably capture more of the market.<ref>{{cite book|title=Public Finance |author= Carl Sumner Shoup|year=2005|publisher=Aldine Transaction|isbn=0-202-30785-9|url= https://books.google.com/?id=N_JHg2A2uw0C&pg=PA155&dq=%22Edgeworth+paradox%22}}</ref> |
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== See also == |
== See also == |
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Revision as of 14:53, 24 April 2021
To solve the Bertrand paradox, the Irish economist Francis Ysidro Edgeworth put forward the Edgeworth Paradox in his paper "The Pure Theory of Monopoly", published in 1897.[1]
In economics, the Edgeworth paradox describes a situation in which two players cannot reach a state of equilibrium with pure strategies, i.e. each charging a stable price. A fact of Edgeworth-Paradox is that in some cases, even if the direct price impact is negative and exceeds the conditions, an increase in cost proportional to the quantity of an item provided may cause a decrease in all optimal prices.[2] Due to the limited production capacity of enterprises in reality, if only one enterprise's total production capacity can be supplied cannot meet social demand, another enterprise can charge a price that exceeds the marginal cost for the residual social need.[3]
Suppose two companies, A and B, sell an identical commodity product, and that customers choose the product solely on the basis of price. Each company faces capacity constraints, in that on its own it cannot satisfy demand at its zero-profit price, but together they can more than satisfy such demand.
Edgeworth Pardox assumption of the Cournot model as follows: 1. The production capacity of the two manufacturers is limited. Under a certain price level, the output of a particular Oligopoly cannot meet the market demand at this price level so that another manufacturer can obtain the residual market demand. 2. In a certain period, two prices can exist in the market at the same time. 3. When a particular Oligopoly chooses a certain price level, another Oligopoly will not immediately respond to the price.[4] The Edgeworth model shows that the oligopoly price fluctuates between the Perfect competition market price and the perfect monopoly price, and there is no stable equilibrium.[5]
Unlike theBertrand paradox, the situation of both companies charging zero-profit prices is not an equilibrium, since either company can raise its price and generate profits. Nor is the situation where one company charges less than the other an equilibrium, since the lower price company can profitably raise its price towards the higher price company's price. Nor is the situation where both companies charge the same positive-profit price, since either company can then lower its price marginally and profitably capture more of the market.[6]
See also
References
- ^ Edgeworth, Francis Ysidro (1925). Papers relating to political economy. Royal economic society by Macmillan and Company, limited.
- ^ Selten, Reinhard (1970). "Das Edgeworth-Paradox". Preispolitik der Mehrproduktenunternehmung in der statischen Theorie. 16: 71–85. doi:10.1007/978-3-642-48888-7_6.
- ^ Edgeworth, Francis Ysidro (1925). Papers relating to political economy. Royal economic society by Macmillan and Company, limited.
- ^ Edgeworth, Francis Ysidro (1925). Papers relating to political economy. Royal economic society by Macmillan and Company, limited.
- ^ Xavier, Vives (1 April 1993). "Edgeworth and modern oligopoly theory". European Economic Review. 37 (2–3): 463–476. doi:10.1016/0014-2921(93)90035-9.
- ^ Carl Sumner Shoup (2005). Public Finance. Aldine Transaction. ISBN 0-202-30785-9.
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