The Stability of Virtual Equilibrium

Selim, Tarek (2004): The Stability of Virtual Equilibrium. Published in: Journal of Business and Economics Research , Vol. 2, No. 12 (December 2004)

Abstract

The impact of information technology (IT) on the stability of market equilibrium is explained from a simple microeconomic standpoint. Attributes of a dynamically stable “virtual” market equilibrium are described assuming consumer rationality, an elastic supply curve, and minimum static market demand. Three conditions are necessary for long-run price stability of such a “virtual” equilibrium: (1) firm-specific strategic effects have to be completely offset by aggregate demand growth effects, (2) market equilibrium must arise under the constraint of demand sustainability, and (3) consumer indirect utility gains from information availability must exceed their respective disutility from locational search costs. Those conditions stem from more elastic supply together with less elastic demand compared to when IT is not utilized.

• Item Type: MPRA Paper
• Language: English
• Keywords: information technology, virtual market, equilibrium stability, consumer rationality, elastic supply, strategic effects, growth effects
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; L - Industrial Organization > L8 - Industry Studies: Services > L86 - Information and Internet Services ; Computer Software; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

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