Market allocations under conflation of goods

TL;DR

This paper examines how conflating a continuum of goods into a finite set impacts competitive equilibria, resource allocation, prices, and welfare in exchange economies.

Contribution

It introduces the effects of conflation choices on equilibrium outcomes, highlighting their influence on prices, trading, and welfare in a novel way.

Findings

Conflation choices significantly alter relative prices.

Resource allocation is constrained by conflation.

Welfare outcomes are affected by the design of conflation.

Abstract

We study competitive equilibria in exchange economies when a continuum of goods is conflated into a finite set of commodities. The design of conflation choices affects the allocation of scarce resources among agents, by constraining trading opportunities and shifting competitive pressures. We demonstrate the consequences on relative prices, trading positions, and welfare.