When Do Markets Work? Multiplex Networks and Efficiency

2026-05-20

AI Summary

This study investigates whether competitive markets can achieve allocative efficiency in the presence of multiple network externalities. By constructing an Arrow–Debreu general equilibrium model that incorporates network externalities, consumer centrality, and cross-good budget constraints—and integrating tools from network analysis with welfare economics—it demonstrates that the First and Second Fundamental Theorems of Welfare Economics continue to hold when the underlying networks for each good are regular or structurally aligned. The paper further proposes a Lindahl equilibrium mechanism based on personalized pricing, which can restore allocative efficiency in cases of market failure, albeit potentially at the cost of reduced consumer welfare. The work thus establishes sufficient conditions for market efficiency under complex network externalities and offers a novel pathway for recovering efficiency when markets fail.

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.

Problem

• market efficiency
• externalities
• multiplex networks
• Arrow-Debreu economy
• welfare theorems

Innovation

• multiplex networks
• market efficiency
• externalities
• Lindahl equilibrium
• Arrow-Debreu economy