A SIMPLE MODEL OF IMPERFECT COMPETITION WITH WALRASIAN FEATURES

Abstract

IMPERFECT competition is a pervasive part of modern industrial economies, where high levels of concentration in product markets often coexist with unionised labour markets. Most standard macroeconomic models, however, assume that markets are perfectly competitive. This paper provides a simple framework in which we are able to explore some of the implications of imperfect competition for the macroeconomy, and to evaluate the adequacy of competitive macroeconomic models as convenient simplifications. results of the paper suggest that whilst some general features of competitive macromodels do carry over to an imperfectly competitive framework, others do not. Imperfect competition in the labour and product market can have a significant impact on the level of employment and the effectiveness of macroeconomic policy. Imperfect competition provides an explicit account of price and wage determination, and thus gives us a far greater insight into the macroeconomic structure of macroeconomic equilibrium than is possible in competitive models. This paper presents a simple model of imperfect competition with features. The model is Walrasian both in some of its assumptions,0 and also in the properties of the model. What we have attempted to do is to take a standard neoclassical synthesis macromodel (e.g. Patinkin (1965), Branson (1979)) and introduce imperfect competition into the product and labour markets. We feel that this is a useful exercise for two reasons. Firstly, it provides a simple macro model of imperfect competition in which the causal mechanisms are very clear. In general, models of imperfect competition have tended to be rather complex, despite a recent trend towards simpler versions (e.g. Hart (1982), d'Aspremont et al. (1985)). Secondly, by adopting the standard neoclassical synthesis framework, it is easy to relate the model of imperfect competition to more familiar models. Imperfect competition in the product is modelled using conjecturalvariations Cournot equilibrium which captures a wide range of possible market solutions, encompassing perfect competition, Cournot, and joint profit maximisation as special cases. This approach contrasts with existing I would like to thank Ben Lockwood and Dennis Snower for many useful conversations. The first section of the paper was used for the M.Sc. macroeconomics course at Birkbeck in March 1985. The current revision owes much to comments made at the time. Financial support from the ESRC is gratefully acknowledged. Faults, alas, remain my own. ?These assumptions include that of Leontief technology in Section 1. It is often forgotten that Walras made wide use of coefficients de fabrication in his work.