Edgeworth paradox

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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.

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.

Unlike the 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.[1]

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References[edit]

  1. ^ Carl Sumner Shoup (2005). Public Finance. Aldine Transaction. ISBN 0-202-30785-9.