Existence and uniqueness of equilibria with increasing returns (Q1114573): Difference between revisions

It is well known that firms' profit maximizing behavior is inconsistent with the existence of equilibria in an economy with increasing returns to scale (or non-convex) technologies. The main purpose of this paper is to show that if firms adopt price setting behaviors then, under certain assumptions, there exists an equilibrium even in an economy with non- convex technologies. In addition, the method of the proof allows us to deduce a uniqueness condition. We consider an economy with several goods, several consumers, and several nonconvex firms. Each firm follows a pricing rule, i.e., a mapping (correspondence) from the boundary of the production set to the price simplex, and gurantees the profit per scale of production to be asymptotically non-negative. Thus both average cost pricing and mark-up pricing are included in our model. The conditions for a (price setting) equilibrium are (i) all firms set the same prices, (ii) consumers maximize their utilities subject to their budget constraints, and (iii) all markets clear.