Assumption Of Perfect Competition Research Articles

Peace, War and the Market

This paper examines the interactions between the market place and the political arena from the perspective of improving our understanding of whether the market is a force for peace or a cause of war. Economists generally presume that, since the market is based on voluntary transactions, it stands as an alternative to war as a resource allocation mechanism. War is usually assumed to be exogenous to the system. This paper questions this assumption by suggesting that war may also be endogenous to the system. It examines how conflict mray arise from changes in the distribution of income, technological changes and rent-seeking activity. Trade in a perfectly competitive market is probably the best example of the market as a force for peace. Since no one will voluntarily engage in a transaction that will make him or her worse off, the market allocation mechanism must be a positive sum game, which increases social welfare. The military allocation mechanism, on the other hand, is either a zero sum game in which the victors gain at the expense of the vanquished or one in which the net change in social welfare is negative, with the total losses exceeding the gains of the victors. From this perspective, the mutual benefit of market transactions can be viewed as a force for peace. A perfectly functioning market economy would reach a Pareto optimum over time. At this point, welfare is maximized and no one can become better off without making someone else worse off. The positive sum game of the sub-optimal state is thus transformed into the zero sum game of the optimal one. We then can expect that the players, motivated by self-interest, will resort to extra-market activities, including force, to enhance their incomes. Ironically, the very success of the voluntary market allocation mechanism in maximizing welfare may spell its doom. In actuality, the above example is an unrealistic one, based on the assumptions of perfect competition and a static economy. In today's world of imperfect competition there is no certainty that trade is mutually

Technical Change in Chinese State Industry: A New Approach

In this paper, an economically consistent framework which yields dual measures of technical change is developed. The major advantages of the proposed approach over previous ones are that (i) the restrictive assumption of perfect competition is relaxed; (ii) it is no longer necessary to use time to index technology levels; (iii) a parametric specification of the production or cost function is not needed; and (iv) no assumptions on the character of technical progress are required. The conventional assumption of constant returns to scale is, however, retained. Applications of the proposed methodology using Solow's and Chinese state industry data yield results that broadly conform with expectations.

Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing

It is well known that under the assumptions of constant returns to scale, perfect competition, and the absence of factor hoarding, primal and dual productivity measures should be highly correlated. The apparent lack of correlation is usually attributed to fixed factors of production. In this paper I propose an alternative explanation by relaxing the assumption of perfect competition. By controlling for the presence of a markup component, I demonstrate that both productivity measures are in fact highly correlated for U.S. manufacturing. The analysis also provides an alternative method of estimating a markup of prices over marginal cost that avoids certain difficulties inherent in some existing methods of estimation.

Tradeable permits, missing markets, and technology

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the “optimal” number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy.

Monopolistic competition, technology shocks, and aggregate fluctuations

We analyze a real business cycle (RBC) model in which aggregate production exhibits increasing returns to specialization in conjunction with imperfect competition and free entry and exit of firms over the business cycle. We show that the requirements of both high variance and high persistence in technology shocks that have been noted by critics of RBC theory may arise from the assumptions of perfect competition and constant returns to scale, rather than from the general proposition that real productivity shocks can significantly account for the business cycle.

Exchange risk, exposure, and the option to trade

Rather than impeding trade, increased exchange rate uncertainty may on average create trade as it implies a higher probability that ex post deviations from Commodity Price Parity will exceed tariffs and transportation costs. We demonstrate such an effect in a small-country, short-term model, under the alternative assumptions of perfect competition and of a monopolist trader-producer. The proofs rely on the fact that such firms' exposures can be replicated (and hedged) by standard options. Under partial monopoly scenarios, the effect of volatility is ex ante unclear, though. (JEL F31)

Conceptual Underpinnings Of Policy Analysis For Rural Development: Discussion

in the conceptualization process. They raised imporThe first section of the paper provided an overview tant questions about how world changes (globalizaof rural development and policy analysis. The tion) will impact the way we conduct business authors describe rural development policy as a com- among ourselves as well as with the rest of the world. plex process that cuts across many subject areas, Research questions raised were: does globalization, levels of government, and units (individuals, fami- which implies a world-wide free market, reinforce lies, communities, etc.). The process is further com- our assumption of perfect competition, and how will plicated because those policies developed today will individual choices in the hinterlands be affected by have lag effects off into the future. I think that the globalization process. additional insights about the complexity of policy In the final section of the paper, on suggested analysis could have been gained from a brief defini- approaches for rural development policy analysis, tion of the policy process. The policy process is the authors noted that economics is not adequate for defined as a course of action or pattern of activities capturing the important dynamics shaping the future and not a simple decision to act in some particular of rural and urban communities and interdependenway at a particular moment (Anderson). Policy cies among such communities. Therefore, they proanalysis requires that all activities associated with a posed two conceptual tools for undertaking rural given policy be identified and measured over time, policy analysis: (1) Counter-factual, the impact of thus further complicating the process. policy changes are dynamic in nature. Policy analy

Generalized Q Models for Investment

The authors extend the Q theory of investment to allow for adjustment costs for labor, under the additional assumption that the firm is a monopolistic competitor in the output market. The issue of nonconstant returns to scale is also discussed. The authors show that the standard Q model is a special case of a more general model involving testable parameter restrictions. Estimates for the U.S. manufacturing sector suggest that the departure from the assumption of perfect competition and lack of adjustment costs for labor receive empirical support in the data. Copyright 1991 by MIT Press.

Modelling non-competitive behavior in commodity markets: A game theoretic approach

In this paper, we provide a coalitional alternative to the perfectly competitive and purely non-cooperative assumptions commonly employed in the modelling of commodity markets. These assumptions of perfect competition or pure non-cooperation are usually imposed exogenously without providing an economic basis for assuming why firms that could stand to gain by cooperating would not in fact do so. Three behavioral rules embodied in three different cooperative games are discussed in this paper and a methodology for predicting the coalition structures that would result from each of these is offered. By applying these games to the US copper industry of the 1970's, we show that the theory of games can be profitably employed in conjunction with the traditional “institutional approach” of industrial organization to yield useful economic predictions.

Monopolistic competition and the Q theory of investment

In this paper we analyse the implications for Q models of investment of replacing the assumption of perfect competition in the output market with the assumption of monopolistic competition. The structural investment equation that can be derived in this case has a richer dynamic structure than the conventional one and it contains, in addition to present and future Q, output as an explanatory variable. In the applied section we discuss the extent to which monopolistic competition helps in providing a remedy for the empirical weaknesses of Q models. The estimates are obtained using aggregate data for U.K. industrial and commercial companies for the period 1951–1979.

Are purchased information services underused in manufacturing? Evidence from Japan, Korea and Taiwan

Macro-production functions which include purchased information services as an intermediate input are estimated for the manufacturing sectors of Japan, Korea and Taiwan. The aim is to assess the degree of suboptimal use of this input. Similar previous studies mainly concentrated on the US, using single equation estimation methods. Using a translog function approach, the results in this study seems to indicae hat purchased information services are used suboptimally in the manufacturing sectors of all three economies. The largest suboptimal use is observed in Korea. Economic policies fostering the development of information service industries might therefore be more urgent in NICs than in developed economies. However, out results are subject to the assumption of perfect competition in product and factor markets.

Emerging as a Major Carrier: A Case Study of America West Airlines

Emerging as a Major Carrier: A Case Study of America West Airlines

Does the aggregate production function imply anything about the laws of production? A note on the Simon and Shaikh critiques

The aggregate production function (especially the Cobb–Douglas) is widely used in both applied and theoretical work, in spite of the large number of criticisms of it that have been advanced since its inception. Two related criticisms by Simon and Levy (1963) and Shaikh (1974) are particularly damaing since they have shown that if factor shares are stableanyunderlying technology will generate a Cobb–Douglas relationship. This argument seems to have been largely ignored in the literature or, by implication, not seen as particularly important. The purpose of this paper is to assess and extend these criticisms. New empirical evidence is presented which, it is argued, illustrates the former. Furthermore, it is shown that a Kaleckian mark-up model will equally give rise to a Cobb–Douglas even though, of course, no neoclassical assumptions are invoked. It is concluded that the Cobb–Douglasper se can give no independent corroboration of either the marginal productivity theory of distribution or the assumption of perfect competition.

NON-COOPERATIVE STRATEGIES FOR DYNAMIC POLICY GAMES AND THE PROBLEM OF TIME INCONSISTENCY

COMPETITION between decision makers is often characterised in economics as a noncooperative game. But when the decisions of a finite number of agents are linked over time in a multiperiod problem, as typically happens in policy models or market models of disequilibrium behaviour, the conventional solutions become dynamically inconsistent because they fail to allow for the noncausal effects, on current decisions, of rational expectations of the endogenised future choices. This has left the economist with the problem of determining what decision rule is best, and the decision maker with the problem of how to justify actions which are predictably inconsistent dynamically as well as suboptimal (Buiter (1981)). Many of the controversies of economic theory have been concerned with the behaviour of a small number of self-interested decision makers, or with economic behaviour when the assumptions of perfect competition are not appropriate. For example, Keynesian demand analysis recognises that government action can systematically influence the income level; but the monetarists doubt this, at least for the long term. The Philips curve suggests that organised labour may be able to influence the wage-unemployment trade-off; and so on. Then collective bargaining, international trade policy, or oligopolistic firms, provide further examples.' But the literature has yet to provide a detailed structural analysis of the optimal strategies for such dynamic policy games. This paper derives the optimal strategies for a two player nonzero sum dynamic game. Starr and Ho (1969) have used numerical examples to show that conventional recursive optimisation techniques (e.g. dynamic programming) can produce suboptimal decisions. By using a different optimisation method we find that dynamic programming generally produces suboptimal decisions because this kind of constrained optimisation problem lacks the time-recursive structure necessary for recursive optimisations. Hence the 'noncausal' effects (defined below, in Section 5.2) are ignored. These results are used to assess the impacts of the associated suboptimality on competitive decisions. It appears that strategies which ignore noncausal effects can be inferior even to those which ignore the game or misspecify the equilibrium conditions.

A note on the nonequivalence of import barriers and voluntary export restraints

This paper uses a general equilibrium approach to analyze the consequences of import barriers and voluntary export restraints with respect to international prices and domestic prices under the assumption of perfect competition in all markets. It shows that the final outcome with respect to domestic prices depends on the way in which governments allocate the revenue arising from the restrictions. The equivalence result, obtained by using partial equilibrium, is only one of the possible outcomes.

Passing on the Monopoly Overcharge: A Further Comment on Economic Theory

If price of a factor of production increases, then intermediate producers will pass on part of increase to consumers. The ability of an intermediate producer to pass on a monopoly overcharge was discussed by Supreme Court in Illinois Brick Co. v. Illinois 1 and in Hanover Shoe Co. v. United Shoe Machinery Corp.2 In Illinois Brick, Supreme Court unequivocally stated its understanding of relevant economic theory: If usual assumptions of perfect competition are met, then the ratio of shares of overcharge borne by passee and passer will equal ratio of elasticities of supply and demand in market for passer's product. 3 This is not correct economic theory to apply to monopoly overcharges. The Supreme Court arrived at this formula by applying tax incidence theory to monopoly overcharge problem. This error apparently occurred because Supreme Court used theory of incidence of an excise tax on a consumer good 4 instead of theory of incidence of a tax on a factor of production. If price of one factor of production rises, then producers will attempt to substitute other factors whose prices have not risen for overcharged factor. Technical features of production process will determine whether substitution is easy or difficult. If substitution is easy, then overcharge on a factor will not cause consumer prices to rise very much. If, however, substitution is difficult, and overcharge represents a large proportion of production costs, then consumer prices will rise a great deal. Factor

Extensions to Portfolio Theory to Reflect Vast Wealth Differences Among Investors

Much of modern portfolio theory rests on conclusions drawn from the original form of the Capital Asset Pricing Model. Fundamental to the conclusions of this model is the assumption of perfect competition among investors; i.e., all inves? tors possess approximately the same small amount of wealth such that equilibrium price cannot be influenced significantly by the demand of any of the investors. Today's security market, however, is characterized by individuals and large in? stitutional investors such as insurance companies and investment funds. Al? though institutions represent a very small fraction of all investors in the mar? ket, institutional investors in 1977 held 34.3 percent of all outstanding stock. By the very magnitude of the dollar transactions effected by these large inves? tors, prices can and are affected dramatically. Because today's security market is composed of investors exhibiting extreme differences in wealth, the United States securities market probably is not perfectly competitive as assumed in portfolio theory. Consequently, investment theory must be extended to reflect vast wealth differences among investors. To achieve this end, modifications are made to the original Capital Asset Pricing Model. Equilibrium conditions are examined and conclusions are drawn as to how portfolio theory must be altered to include price affecting ability by a segment of the investors in the market. Economic usage of the term, imperfect competition, implies a setting wherein vast differences in wealth affect equilibrium prices through the behavior patterns of buyers and sellers. In terms of financial theory and for purposes of this research, the definition of imperfect competition will be delimited to a security market composed of two types of investors: one, the investor incapable of affecting equilibrium prices-price takers; the second, the investor whose transactions are sufficiently large to influence equilibrium prices-price affectors. Furthermore, due to the sensitivity of equilibrium prices to the

The Falling-Rate-of Profit Theory of Crisis: A Rational Reconstruction by Way of Obituary

This paper traces the development of the falling-rate-of profit theory of crisis from its original and traditional version to its modern variant and finally to A. Shaikh's recent defense based on the distinction between circulating and fixed capital. At each stage the major arguments in favor of and against the falling-rate-of-profit thesis are reviewed and criticized. On balance, the conclu sions are almost universally negative: It cannot be shown in general that a rise in the organic composition of capital leads to a fall in the rate of profit; neither can it be shown that a fall in the general rate of profit necessarily induces a crisis of overproduction. Finally, Okishio's theorem is employed to show that profit- maximizing capitalists, under competitive conditions, would never adopt a tech mque which would lower the general rate of profit at a given level of wages. Thus, a fallmg-rate-of-profit crisis is not a theoretical necessity; indeed, it is not even a possibility under conditions of competitive capitalism. Shaikh's thesis is then dis cussed and it is seen that a falling rate of profit is a possibility when the assump tions of perfect competition are relaxed. The paper is concluded with a comment regarding the conflict between "scientific" and "extrascientific" considerations in the course of the discussions of the falling rate of profit.

The choice between a tariff and a quota under uncertainty

The results concerning the choice between a tariff and a quota under the assumption of perfect competition and three kinds of uncertainty are summarized in the table. An analysis of the uncertainty, under which a government using a tariff or a quota can determine the value of imports or the quantity domestically supplied (i.e. employment), gives neither the same result for the two instruments (equivalence) nor the same result for the three situations considered. Therefore the choice between a tariff and a quota in case of uncertainty depends on the purpose, and whether the initial uncertainty concerns domestic demand, foreign or domestic supply. This conclusion corresponds to the well-known phenomenon that in case of a disturbance to an open economy the choice between a change in the rate of exchange and a change in the demand policy depends both on the goal and on the kind of disturbance.

The Sociological Foundations of Consumer Behavior: Their Implications for Economic Efficiency

Abstract. Neoclassical economic theory asserts that when the assumptions of perfect competition apply to a market economy, the allocation of inputs and/or outputs is such that by additional inputs or outputs no individual's welfare can be improved without diminishing some other individual's. That is, it is considered Pareto Efficient. When imperfect markets exist, however, externalities—influences from outside the economic process—in production and exchange, and indivisibilities—benefits or costs which cannot be allocated to or assessed against the individuals who enjoy or occasion them—appear and the market ceases to be an efficiently operated one. It is argued here that a fourth category of factors exists which may interfere with economic efficiency and that these factors are sociological in nature, factors arising from such considerations as class, status, role and power.