On Adjustment Costs and the Stability of Equilibria.

Macleod, W. Bentley

In practice one does not expect conflicting agents to move instantaneously to an equilibrium. Instead the final equilibrium is often the consequence of "disequilibrium dynamics". This paper, through the use of local game theory, introduces a general framework for disequilibrium dynamics based on the existence of adjustment costs. The analysis is presented within the context of oligopoly theory and shows that the existence of adjustment costs will in many cases result in a unique equilibrium at which market shares are inversely proportional to these costs. This paper also introduces two new solution concepts for n-person normal form games.

ADJUSTMENT costs; ECONOMIC equilibrium; EQUILIBRIUM; GAME theory; COST; THEORY; INDUSTRIAL costs; MATHEMATICAL models; EXTERNALITIES; STABILITY (Mechanics)

Review of Economic Studies, 1985, Vol 52, Issue 4, p575

0034-6527

Academic Journal

10.2307/2297733