Economic Implications of the Braess Paradox in Competitive Markets

17 Pages Posted: 10 Nov 2009

Date Written: September 7, 2009

Abstract

The Braess' Paradox (Braess (1968)) exhibits, counterintuitively, that adding capacity to a noncooperative network may reduce its overall performance. Using an analogy between networks and production economies, we demonstrate that an improvement in the production technology of an intermediate good may induce (i) a supply contraction, i.e., increase the equilibrium price of the end (consumption) good and/or decrease its equilibrium quantity; and (ii) a demand contraction, i.e., decrease the equilibrium price of the input and/or decrease its equilibrium quantity. Importantly, the devised setup is not culpable of production externalities or any other efficiency threatening conditions.

Suggested Citation

Kliger, Doron, Economic Implications of the Braess Paradox in Competitive Markets (September 7, 2009). Available at SSRN: https://ssrn.com/abstract=1503289 or http://dx.doi.org/10.2139/ssrn.1503289

Doron Kliger (Contact Author)

University of Haifa ( email )

Haifa 31905
Israel
(972)4-8249587 (Phone)
(972)4-8240059 (Fax)

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