Introduction

Abstract

This study attempts to bridge apparent gaps between partial theories of firm behaviour and economy-wide modelling, and develops an alternative approach to theoretical and policy analysis. Industrial economics focuses on single industries or subsets of industries. These partial models are valid in contexts which allow the neglect of higher order effects, that is when the analysis captures only short term effects, or the effects studied do not have any significant spillover to other sectors or a vanishing macroeconomic impact. If indirect effects cannot be ignored, an economy-wide specification which allows for interdependence between sectors is necessary. This is of course the domain of general equilibrium models. Applied General Equilibrium (AGE) models have been very successful in modelling interdependent markets. However, these models are of limited use in studying the interplay of individual firms with heterogeneous behaviour under observed conditions of imperfect competition. The factualities of these phenomena are very well documented in the literature on industrial economics.