Impossibility of Stable Equilibrium Price

47 Pages Posted: 27 Jun 2018

See all articles by Dmitry Levando

Dmitry Levando

National Research University Higher School of Economics

Maxim Sakharov

Bauman Moscow State Technical University

Date Written: June 9, 2018

Abstract

We develop a theory of equilibrium market instability in a general equilibrium duopoly caused merely by strategic trade. An economy is described as a strategic market game, where players have market power as buyers and sellers.

First order conditions of individual decisions are the first kind integral equations of Fredholm with probability distributions as unknown variables. The game has multiple mixed strategies Nash equilibria, any of which can be constructed exactly. Hence players do not have a converging belief system. This imposes a restriction to existence of common beliefs of common knowledge, rational expectations equilibrium, information discovery property of market price. We demonstrate multiplicity of Pareto-improving pure strategies, induced prices and allocations, what can be a 'natural instability' of a market.

Keywords: strategic market games,ill-posed problems,common-knowledge,rational expectations,efficient market

JEL Classification: C61, C68, C72, D58; E30, E37, G14, G17

Suggested Citation

Levando, Dmitry and Sakharov, Maxim, Impossibility of Stable Equilibrium Price (June 9, 2018). Available at SSRN: https://ssrn.com/abstract=3193283 or http://dx.doi.org/10.2139/ssrn.3193283

Dmitry Levando (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Maxim Sakharov

Bauman Moscow State Technical University ( email )

Brigadirskiy pereulok, 14
Moscow, 105005
Russia

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