The introduction and widespread use of credit cards increases trading efficiency but, by also increasing the velocity of money, it causes inflation, in the absence of monetary intervention.
If the monetary authority attempts to restore pre-credit card price levels by reducing the money supply, it might have to sacrifice the efficiency gains.
When there is default on credit cards, there is even more inflation, and less efficiency gains. The monetary authority might then have to accept less than pre-credit card efficiency in order to restore pre-credit card price levels, or else it will have to accept inflation if it is unwilling to cut efficiency below pre-credit card levels. This could be a source of stagflation.
We show that intermediate goods can be sourced to firms on the “outside” (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that “inside” firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.
We derive the existence of a Walras equilibrium directly from Nash’s theorem on noncooperative games. No price player is involved, nor are generalized games.
JEL Classification: 026
Keywords: Walras equilibrium, game theory, Nash model, noncoperative games