Edgeworth paradox
Encyclopedia
In economics
, the Edgeworth paradox describes a situation in which two players cannot reach a state of equilibrium
with pure strategies, i.e. each charging a stable price.
Suppose two companies, A and B, sell an identical commodity product, and that customers choose the product solely on the basis of price. Each company faces capacity constraints, in that on its own it cannot satisfy demand at its zero-profit price, but together they can more than satisfy such demand.
Unlike the Bertrand paradox
, the situation of both companies charging zero-profit prices is not an equilibrium, since either company can raise its price and generate profits. Nor is the situation where one company charges less than the other an equilibrium, since the lower price company can profitably raise its price towards the higher price company's price. Nor is the situation where both companies charge the same positive-profit price, since either company can then lower its price marginally and profitably capture more of the market.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the Edgeworth paradox describes a situation in which two players cannot reach a state of equilibrium
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
with pure strategies, i.e. each charging a stable price.
Suppose two companies, A and B, sell an identical commodity product, and that customers choose the product solely on the basis of price. Each company faces capacity constraints, in that on its own it cannot satisfy demand at its zero-profit price, but together they can more than satisfy such demand.
Unlike the Bertrand paradox
Bertrand paradox (economics)
In economics and commerce, the Bertrand paradox—named after its creator, Joseph Bertrand—describes a situation in which two players reach a state of Nash equilibrium where both firms charge a price equal to marginal cost. The paradox is that in reality, it usually takes a large number of firms to...
, the situation of both companies charging zero-profit prices is not an equilibrium, since either company can raise its price and generate profits. Nor is the situation where one company charges less than the other an equilibrium, since the lower price company can profitably raise its price towards the higher price company's price. Nor is the situation where both companies charge the same positive-profit price, since either company can then lower its price marginally and profitably capture more of the market.