Product Market Imperfections: The Theory of Monopoly in General Equilibrium

Abstract

The previous chapter was devoted to the analysis of factor market imperfections in the presence of international trade. The quintessence of the chapter was that the existence of distortions in factor markets could cause reversals in nearly all the results derived from the standard undistorted model. Throughout our analysis there, product markets were still assumed to be perfect. In this chapter we turn to the other side of the exercise and assume that different goods are produced by different monopolists, but that factor markets continue to be perfect. It is worth pointing out here that within the theory of market imperfections it is the distortions in factor markets that have borne the brunt of attack from the trade theorist, whereas the existence of distortions in product markets, perhaps because of the intractability of the problem, has by and large been ignored.