When Do Markets Work? Multiplex Networks and Efficiency

TL;DR

This paper analyzes how multiplex networks influence market efficiency, showing conditions under which markets remain efficient or require Lindahl equilibria for optimal allocation.

Contribution

It introduces a model of Arrow-Debreu economies with multiplex network externalities and characterizes conditions for market efficiency and the role of personalized prices.

Findings

Markets can be efficient despite externalities if networks or layers are regular or uniform.

Competitive markets satisfy welfare theorems under certain network regularity conditions.

Personalized pricing via Lindahl equilibria can restore efficiency when markets are inefficient.

Abstract

We study an Arrow-Debreu economy with externalities generated by multiplex networks. Market equilibrium prices reflect both the preferences and scarcity of goods, consumers' network centralities arising from goods' externalities, as well as linkages across goods (layers) through the budget constraint. Despite the presence of externalities, competitive markets can still be efficient: the First and Second Welfare Theorems hold if either all networks are regular or all layers share the same network structure. When markets allocate goods inefficiently, a Lindahl equilibrium-implemented through personalized prices-can restore efficiency, but may leave some consumers worse off.