Existence and uniqueness of equilibria with increasing returns (Q1114573)

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.