Abstract
A simple imperfectly competitive model of income distribution is developed in which sellers have market power in both product and labor markets. Market power in product markets is the dominant factor affecting relative shares. A mark-up pricing model is put forward in which firms base price on an incorrect mark-up over average variable costs. Simulations suggest that actual mark-ups are likely to be quite close to profit-maximizing levels. However, small deviations from correct levels that imply small individual losses can have quite large macro effects on output, employment, and relative shares. Copyright 1992 by Scottish Economic Society.
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