A Note on Price Instability in General Equilibrium
15 Pages Posted: 11 Sep 2018
Date Written: August 28, 2018
We are developing 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 first kind integral equations of Fredholm, with probability distributions as unknown variables. The game has multiple mixed strategies as Nash equilibria, which cannot be constructed precisely. Resulting market price does not have information discovery properties. We demonstrate the multiplicity of Pareto-improving pure strategies, and their induced prices and allocations, which can described as 'natural instabilities' within markets.
Keywords: strategic market games, ill-posed problems, common knowledge, rational expectations, efficient market, price fluctuations, noise trade, sun-spot equilibrium
JEL Classification: C68, C61, C72, D58, E30, E37, G14, G17
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