LeChatelier-Samuelson Principle in Games and Pass-Through of Shocks

35 Pages Posted: 21 Nov 2015

See all articles by Alexei Alexandrov

Alexei Alexandrov

Independent

Özlem Bedre-Defolie

ESMT European School of Management and Technology; University of Bergen, Economics Department; CEPR IO

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2015

Abstract

The LeChatelier-Samuelson principle ("the principle") states that as a reaction to a shock, an agent's short-run adjustment of an action is smaller than the long-run adjustment of that action when the other related actions can also be adjusted. We extend the principle to strategic environments and to shocks that affect more than one action directly. We define long run as an adjustment that also includes the affected player adjusting its other actions and other players adjusting their strategies. We show that the principle holds for 1) supermodular games (strategic complements), 2) submodular games (strategic substitutes) for shocks that affect only one player's action directly and when the players' payoffs depend only on their own strategies and the sum of the rivals' strategies (for example, homogeneous Cournot oligopoly). We also provide other sufficient conditions for the principle to hold in games of strategic substitutes. Our results imply that when the principle holds a multiproduct oligopoly might have lower cost pass-through in the short run than in the long run. Hence, we argue that the principle might explain the empirical findings of overshifting of cost and unit tax by multiproduct firms.

Keywords: LeChatelier-Samuelson Principle, pass-through rate, overshifting, oligopoly, multiproduct, multiplier

JEL Classification: D21, D24, H22, K21, L13, L51, M31

Suggested Citation

Alexandrov, Alexei and Bedre-Defolie, Özlem, LeChatelier-Samuelson Principle in Games and Pass-Through of Shocks (November 19, 2015). Available at SSRN: https://ssrn.com/abstract=2693281 or http://dx.doi.org/10.2139/ssrn.2693281

Alexei Alexandrov (Contact Author)

Independent

No Address Available

Özlem Bedre-Defolie

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany
+49(0)30212311531 (Phone)

HOME PAGE: http://www.esmt.org

University of Bergen, Economics Department ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

CEPR IO ( email )

London
United Kingdom

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