Economic Implications of the Braess Paradox in Competitive Markets
17 Pages Posted: 10 Nov 2009
Date Written: September 7, 2009
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: Suggested Citation