The Average-Marginal Relationship and Tractable Equilibrium Forms
55 Pages Posted: 30 Dec 2012 Last revised: 27 Oct 2016
Date Written: October 26, 2016
Economic variables with familiar tractable functional forms (constant-elasticity or linear) are only reweighted in the change from their average to marginal versions. They are also simple, featuring only one or two terms. These properties allow for closed-form solutions. We explicitly characterize all equilibrium systems obeying a generalization of these properties, showing they form a hierarchy of tractability. The resulting forms are more realistic (e.g. bell-shaped demand and U-shaped cost) but highly tractable. These forms have importantly different implications for policy analysis, as we illustrate with applications from innovation, industrial, international, auction and public economics.
The online appendix for this paper are available at the following URL: http://ssrn.com/abstract=2575471