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

48 Pages Posted: 24 Nov 2015 Last revised: 20 Jan 2017

See all articles by Alexei Alexandrov

Alexei Alexandrov

Amazon.com; Independent

Özlem Bedre-Defolie

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

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Date Written: March 1, 2016

Abstract

The LeChatelier-Samuelson 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 define long run as an adjustment that also includes other players adjusting their strategies. We show that the principle holds for both idiosyncratic shocks (affecting only one player's action directly) and common shocks in supermodular games, only for idiosyncratic shocks in submodular games if the players' payoffs depend only on their own strategies and the sum of the rivals' strategies (for example, homogeneous Cournot oligopoly), and only for idiosyncratic shocks in other games of strategic substitutes or heterogeneity satisfying Morishima Conditions. We argue that the principle might also explain the empirical findings of overshifting of cost and unit tax by multiproduct firms.

Keywords: LeChatelier-Samuelson principle, cost passthrough, multiproduct firms

Suggested Citation

Alexandrov, Alexei and Alexandrov, Alexei and Bedre-Defolie, Özlem, LeChatelier-Samuelson Principle in Games and Pass-Through of Shocks (March 1, 2016). ESMT Working Paper No. 15-03 (R1), Available at SSRN: https://ssrn.com/abstract=2694437 or http://dx.doi.org/10.2139/ssrn.2694437

Alexei Alexandrov

Independent

Amazon.com ( email )

Seattle, WA 98144
United States

Özlem Bedre-Defolie (Contact Author)

ESMT European School of Management and Technology ( email )

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Germany
+49(0)30212311531 (Phone)

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

University of Bergen, Economics Department ( email )

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N-5007 Bergen, 5007
Norway

CEPR IO ( email )

London
United Kingdom

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