Network Topology and the Efficiency of Equilibrium

39 Pages Posted: 24 Jul 2001

See all articles by Igal Milchtaich

Igal Milchtaich

Bar-Ilan University - Department of Economics

Date Written: August 2005

Abstract

Different kinds of networks, such as transportation, communication, computer, and supply networks, are susceptible to similar kinds of inefficiencies. These arise when congestion externalities make the cost for each user depend on the other users' choice of routes. If each user chooses the least expensive (e.g., the fastest) route from the users' common point of origin to the common destination, the result may be Pareto inefficient in that an alternative choice of routes would reduce the costs for all users. Braess's paradox represents an extreme kind of nefficiency, in which the equilibrium costs may be reduced by raising the cost curves. As this paper shows, this paradox occurs in an (undirected) two-terminal network if and only if it is not series-parallel. More generally, Pareto inefficient equilibria occur in a network if and only if one of three simple networks is embedded in it.

Keywords: Congestion, externalities, topological efficiency, nonatomic games, network topology, Braess's paradox, transportation networks, Wardrop equilibrium

JEL Classification: C72, R41

Suggested Citation

Milchtaich, Igal, Network Topology and the Efficiency of Equilibrium (August 2005). Available at SSRN: https://ssrn.com/abstract=275478 or http://dx.doi.org/10.2139/ssrn.275478

Igal Milchtaich (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel

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