LeChatelier-Samuelson Principle in Games and Pass-Through of Shocks

Abstract

We show that the LeChatelier-Samuelson principle holds in many strategic environments: the adjustment to changes in parameters (shocks) in the short run (only by one player) is smaller in magnitude than the adjustment in the long run (allowing other players to adjust as well). We show that the principle holds for supermodular games (strategic complements) regardless of whether the shock directly affects only one player's action (idiosyncratic shock). The principle holds for submodular games (strategic substitutes) if the shock is idiosyncratic and there are only two players. We provide a simple sufficient condition for the principle to hold in submodular games with more than two players. The principle might fail to hold in submodular games if the shock is not idiosyncratic. We show that our findings explain the breakdown of the principle in non-strategic environments as well, apply our results to multiproduct monopoly and oligopoly cost pass-through, and argue that the principle might explain the empirical findings of overshifting of cost and tax changes.