Perfect Competition Equilibrium Research Articles

Parallel Extended Path Method for Solving Perfect Foresight Models

We parallelize the extended path method for solving rational expectations models, and apply it to compute perfect foresight competitive equilibrium for the global economy with multiple goods, regions, industries, and households. At each iteration, first intertemporal variables are updated, then equations for intra-temporal variables are solved in parallel. We compare serial, and parallel, versions of the extended path method in high-performance computing environments based on scenarios with long time horizons that include future populations, economic growth, energy use, and carbon dioxide emissions. Relative to the serial version, the speedup factor for the parallel extended path method grows almost linearly up to about 30 times with 18 cores, and computing times reduced from over 10 h for the serial version down to about 20 min for the parallel version.

Competition and cooperation in a two-sided matching market with replication

We replicate the “Multiple-partners game” of Sotomayor (1992) to yield a sequence with infinitely many terms. Each term, with more than one stage, is endowed with a structure of subgames given by the previous terms. The concepts of sequential stability and of perfect competitive equilibrium are introduced and characterized. We show that there is a subsequence, such that, for all its terms, these concepts, as well as the traditional concepts of stability and of competitive equilibrium, lead to the same set of allocations, which may be distinct of the core. This not always hold for the terms out of that subsequence.

Optimal Taxation and Debt Management without Commitment

According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not tax on the downward slopping side of the Laffer curve, even if it is ex-ante optimal to do so. In light of this finding, we propose a new framework to characterize time-consistent policy. We consider a Markov Perfect Competitive Equilibrium, where a government reoptimizes sequentially and may deviate from the optimal commitment policy. We find that, in a deterministic economy, any stationary distribution of debt maturity must be flat, with the government owing the same amount at all future dates.

FROM HOMO OECONOMICUS TO HOMO ALTIORE (HOLISTIC). IN THE SEARCH OF A NEW PARADIGM

The economic slowdown has brought about dramatic consequences in many countries: non-repayable debts, extreme difficulties for individuals and businesses in obtaining credit, bankruptcies, investor distrust and falls in global stock markets, government bailouts against banks and other financial institutions at risk of failure. In fact, the crisis would probably not have taken place without some political decisions, related to monetary and economic policy, as well as insufficient regulation and monitoring. It can be said that during the crisis, the “invisible hand” of free market turned to “stealing hand” through market games driven by the irrational and irresponsible behaviors of politicians, creditors, and consumers. Current economic theory has been constructed on a foundation laid more than 200 years ago. The traditional economic and finance models are based on the premises of perfect competition, efficient markets, rational behaviors, and market equilibrium. This paradigm suggests that the “invisible hand” will work its magic to resolve all imbalances and bring the economy back to the steady-state equilibrium because market participants behave rationally. This article was inspired by Leibstein’s hypothesis that homo oeconomicus is not a model case but extreme form of behavior that surfaces under extraordinary circumstances. The aim of this paper is an attempt to shift from the concept of homo economicus to the concept of homo altiore (holistic), trying to capture the whole complex nature of human beings.

The Dynamic Rent-Seeking Theory: A Response to Critics

Why is rent-seeking highly relevant for recent economic theory? In this paper, I argue that the common criticism of rent seeking theory is not new and relevant. First, I explain the basis of rent seeking and the main contributions to this theory including the theory of bureaucracy. Then, I explain the criticism of this approach, which attacks the static grounds of this theory stemming from the perfect competition equilibrium model and the normative concretizing of rent-seeking actions. I argue that the rent-seeking theory had already abandoned the static perfect competition model in the 1980s and that arguments using dynamic rent-seeking theory remain normative until they explain the institutional causes of economic development, which has been the centre of the economic profession for centuries.

On the emergence of competitive equilibrium growth cycles

A basic discrete-time heterogeneous capital goods competitive environment is considered, its potential for displaying steady growth solutions analyzed and the properties of the latter characterized. A first composite good may be used for consumption or investment on a one-to-one basis, while a second good is only used for accumulation, solely capital inputs being part of the production process. This framework is first considered from the allocative standpoint through the derivation of the frontier of the production possibility set. Having defined the perfect foresight competitive equilibrium that also describes a Pareto optimum over time, attention is then given to the potential for unbounded steady growth solutions. Under interiority, summability, and expansivity restrictions, there is a unique optimal steady growth rate. For unitary depreciation rates of both capital goods, locally there exists a unique convergent sequence to this steady growth solution that exhibits a saddlepoint structure. However, as soon as one of the depreciation rates of the capital goods is non-unitary and the profit share accruing to the first capital stock is greater in the second pure accumulation industry than in the first composite good industry, the steady growth solution shows a loss of stability, and competitive equilibrium growth cycles emerge through the occurrence of a flip bifurcation in its neighborhood. This is the first optimal cycles result based upon a production set that does not explicitly incorporate any exogenously determined primary labor input in its definition.

Sustainable Development as Part of the New Paradigm in Banking

The term paradigm comes from the Latin word paradigm, which means the approved way of seeing reality in the field, doctrine, or a model, pattern, such as instructive. Paradigms provide ways of looking at reality and create a logical framework for the theory. The latest world economic crisis clearly showed discordance between the theory of finance (including banking) and reality, in particular, how the real world of contemporary paradigms differ, from the traditional neoclassical economics, describing the economic process in terms of homo-economicus and perfect competition equilibrium. Existing paradigms do not include the rapidly progressing globalization, which (despite a number of advantages and opportunities provided) favours widening income gap, which leads to increased poverty and social inequality, preserves ecologically irrational, wasteful patterns of production and consumption, generates multiple divisions and conflicts, causes a stronger dependence of the local risk on a global risk. Therefore, there is no doubt that the time has come to modify (amend or extend) the existing paradigms of finance - especially in light of recent events in financial markets and many years of growing environmental and social problems.

Strategic Behavior and Equilibrium in Experimental Oligopolistic Electricity Markets

The method of experimental economics is applied to research of oligopolistic electricity markets. The design of experimental platform, principles of experimental economics and experimental design are introduced. The experiments are organized on base of the Cournot model of oligopolistic electricity markets. A set of experiments are conducted on the experimental oligopolistic markets with three generating companies (Gencos) and the experimental results are analyzed with strict statistics approaches. The results show that the market competition will converge to the results between perfect competition equilibrium and Nash equilibrium in oligopolistic electricity markets with asymmetric production cost functions and repeated play among the Gencos. The decision support tools of Gencos have significant influences on experimental results. The markets converge to static Cournot-Nash equilibrium when the bounded-rational subjects repeatedly play, equipped with the tools that can give best response strategies. The experimental method provides a complement to the theoretical research and computer simulation and has many merits in modeling realistic electricity markets.

Parametric external economies and the Cambridge controversy on returns

The paper focuses on the theoretical modifications of the concept of external economies built by Marshall. The history of external economies was at its crossroads in the thirties, when the Symposium on Increasing Returns took place in Cambridge. Sraffa formulated the main criticism against external economies by pointing to its lack of compatibility with perfect competition, statics and partial equilibrium. I shall try to show that the construction of parametric external economies by John Chipman (1970) is the logical outcome of the controversy on returns, opposing Sraffa to Marshall, Pigou, Shove and Robertson (1930).

The Demand Elasticity Impacts on the Strategic Bidding Behavior of the Electricity Producers

Due to the oligopoly structure of the electricity markets and to the constraints imposed by the transmission network, the producers may exert market power by strategically bidding higher than their marginal costs. This brings market performance far from the perfect competition equilibrium, with higher market clearing price and extra surpluses obtained by the producers. Demand elasticity can significantly affect the market performance contributing to mitigate the strategic bidding behavior of the producers. Compared to other commodity markets, demand elasticity in the electricity markets is low, but even a small increase can result in appreciable improvement of the market performance. The network constraints of the power system play a specific role in determining the oligopoly equilibrium of the gaming behavior of the electricity producers. The model of supply function equilibrium is first applied to a simple three-bus test system for a conceptual analysis and then to a standard IEEE 30-bus test system. The effects of an increase of demand elasticity are assessed, resorting to a set of proper quantitative indexes

On the stability of Cournot equilibrium when the number of competitors increases

This article reconsiders whether the Cournot equilibrium really becomes a perfect competition equilibrium when the number of competitors goes to infinity. It has been questioned whether the equilibrium remains stable with an increasing number of firms. Contraindications were given for linear and for isoelastic demand functions. However, marginal costs were then taken as constant, which means adding more potentially infinite-sized firms. As we want to compare cases with few large firms to cases with many small firms, the model is tuned so as to incorporate capacity limits, decreasing with an increasing number of firms. Then destabilization is avoided.

Network Constraint Impacts on the Competitive Electricity Markets Under Supply-Side Strategic Bidding

In a competitive electricity market, the oligopoly structure of the market and the network constraints may produce results far from the perfect competition. This paper presents a comprehensive approach to evaluate the performances of the electricity markets with network representation in presence of bidding behavior of the producers in a pool system. A supply function strategic bidding model for the producers is introduced, and then different scenarios in terms of bidding behavior and network constraints are studied and compared on the basis of a set of microeconomic metrics. The aim of the paper is to assess, throughout a set of proper indices, the level of competition in a network-constrained market considering strategic behavior of the producers. The approach proposed gives the possibility to assess the different weight of strategic behavior of the producers and of the network constraints in distorting the market performances from its perfect competition equilibrium. From such an analysis, the worsening of the market efficiency and performances, due to the joint effects of the nonperfect competition and the network constraints, may be assessed and quantified, providing information on the adequacy of the grid considered for accommodating a competitive market. The exploitation of the proposed metrics for the market analysis is shown with reference to the IEEE 30-bus test system with demand elasticity explicitly represented.

98/00264 Computable equilibrium models and the restructuring of the European electricity and gas markets

More regulation, not less, is temporarily necessary, if effective competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of market and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. The paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point to the diversity of institutions that can emerge and to the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.

Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets

More regulation, not less, is temporarily necessary, if effective, competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of markets and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. This paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point out the diversity of institutions that can emerge and to highlight the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and' Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.

A Spatial Equilibrium Model for Imperfectly Competitive Milk Markets

AbstractA generalization of Takayama and Judge's spatial equilibrium model that allows for any degree of market structure is presented. The model is applied to the Japanese dairy industry to examine interregional milk movements generated under alternative assumed degrees of market competition. The results indicate that the perfect competition and monopoly equilibrium solutions result in a lower and a higher price, respectively, than actual price levels. On the other hand, the Cournot‐Nash equilibrium solutions are the most similar to actual observations, and the actual interregional milk movements are best explained by imperfectly competitive behavior.

Monetary equilibrium in an overlapping generations model with productive capital

We study perfect foresight competitive equilibrium in an overlapping generations model with productive capital and a fixed nominal stock of money. We obtain almost-complete characterizations of (a) the existence of a monetary equilibrium from an arbitrary initial capital stock, and (b) the existence of anefficient monetary equilibrium from an arbitrary initial capital stock. When the initial capital stock is no larger than the golden rule stock, the necessary and sufficient condition for both (a) and (b) is the dynamic inefficiency (in the sense of Malinvaud) of the autarkic (or nonmonetary) equilibrium from the same initial stock. However, this condition, though necessary, isnot sufficient for the existence of a monetary equilibrium when the initial stock exceeds the golden rule stock (and still more conditions are needed for anefficient monetary equilibrium to exist). We provide characterizations for these cases, and as corollaries obtain examples in which (a) the nonmonetary equilibrium is inefficient but no monetary equilibrium exists, and (b) monetary equilibria exist but no efficient monetary equilibrium does.

Price dynamics in overlapping generations environments

This work examines the existence, uniqueness and computation of competitive equilibria in a class of overlapping generations environments. This set of environments represents a broad generalization of the overlapping generations model considered by Aliprantis and Plott [1]. Two types of results are presented in this paper. First, some general characteristics of perfect foresight competitive equilibrium price paths are developed for economies with finite or countably infinite time horizons and agents with finite lifetimes. The results establish the conditions leading to locally monotonic and locally stable equilibrium prices given arbitrarily many exogenous parameter shifts. Second, these results are strengthened when consideration is focused on a single parametric shift in a finite economy. Existence of a unique equilibrium price path is established. A simple set of rules are given to facilitate computation of this price path for any given shift.

The Evolutionary Paradigm and the Economics of Technological Change

(1987). The Evolutionary Paradigm and the Economics of Technological Change. Journal of Economic Issues: Vol. 21, No. 2, pp. 751-762.

A simple dynamic general equilibrium model

We analyse a single sector economy with H > 1 infinitely-lived agents that operate in a continuous-time framework. Utility functions are recursive but not additive. Both efficient and perfect foresight competitive equilibrium allocations are considered. The existence and stability of such allocations are investigated locally, i.e., in a neighbourhood of steady-state allocations. The model is shown to be useful for explaining the distribution of wealth and consumption across agents, and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables.

Optimal growth with many consumers

A method is described for constructing all Pareto-optimal allocations for a dynamic economy with many heterogeneous consumers, under certainty, in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time. Optimal (perfect foresight competitive equilibrium) allocations are obtained through the study of a dynamic program. For an economy with one consumption good, sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth. For a two-person exchange economy, sufficient conditions are given for the global asymptotic stability of the unique interior stationary point.