Introduction

Abstract

One of the core building blocks in traditional economic theory is the equilibrium concept (e.g., perfectly competitive equilibrium, monopolistically competitive equilibrium, and informationally efficient equilibrium). Many of the classic equilibrium concepts are derived or established on the basis of the rationality of the individual participants in the sense that they are capable of maximizing their utility, or their profits or forming rational expectation in such a way that a particular equilibrium can be achieved at an aggregate level. For example, the perfectly competitive equilibrium is described to be a market equilibrium outcome in an industry with free entry and exit and completely mobile resources provided that all firms are profit maximizers. Similarly, although Chamberlin and Robinson arrive at monopolistically competitive equilibrium with different techniques, both of their original arguments for deriving this equilibrium rely heavily on rationality and purposive profit maximization. The notion of firms maximizing profits within a monopolistic context has remained in modern analyses of monopolistic competition (e.g., Spence (1976) and Hart 1985a,1985b). Also, an informationally efficient equilibrium can be achieved in the Bayesian Rational Expectation Equilibrium framework if traders are rational, in the sense that they maximize expected utility and form rational expectations. This is shown by Grossman (1976, ), Radner (1979), Hellwig (1980), Allen (1981), and Bray (1981). A new alternative approach to the Bayesian Rational Expectation Equilibrium framework is Maximin Rational Expectation Equilibrium (MREE), see Castro et al. (2011). This approach can be used to examine market efficiency if market individual participants are rational and able to solve the complex problem set up by MREE framework.