Market Imperfections: Basic Integration and Comparison

  • Carl Chiarella
  • Peter Flaschel
  • Gangolf Groh
  • Willi Semmler


Whereas the non-Walrasian approaches considered in the preceding chapter were mainly concerned with a correct description of short-run rationing equilibria on the basis of temporarily given wages and prices, they usually left open the question, how these wages and prices are actually formed and why they are temporarily fixed. Partly as a reaction to this unsatisfactory situation a large number of theories emerged, that tried to give some foundation for these assumptions by explicit consideration of imperfections on the markets for labor or for goods (or both) . Although theories of price formation under imperfect competition on the one hand and macroeconomic models based on price setting or non-market clearing prices both have a long tradition, attempts to integrate both lines have occupied a larger part in economic literature only recently during recent decades. They resulted in a variety of mainly microfounded models of general equilibrium, in which prices were derived from optimizing behavior of agents endowed with some market power. In the following some of these approaches1 shall be briefly sketched, because they provide the background for the aggregative equations employed by Carlin and Soskice (1990) in their basic imperfect competition model, that will later be integrated into the KMG framework. As one main element of the latter is the existence of involuntary unemployment, the question arises, how the non-market-clearing wages, which are mainly responsible for this, are generated. On the other hand, the formation of the prices for goods plays an important role when judging the potential effect of changes of aggregate demand on output.


Real Wage Aggregate Demand Capacity Utilization Imperfect Competition Phillips Curve 
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  1. 1.
    For good surveys and collections of important contributions to this theme see e.g. Mankiw and Romer (1991), Dixon and Rankin (1995), especially chapter 2, and Silvestre (1993, 1995).Google Scholar
  2. 2.
    See, e.g., Dehez (1985), D’Aspremont, Dos Santos Ferreira and Gérard-Varet (1989, 1990, 1991, 1995) or Silvestre (1990) for models in this direction.Google Scholar
  3. 3.
    Compare in this regard also Carlin and Soskice (1990, p.400) .Google Scholar
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    See and Cross (1995, p.187) and Blanchard (1997, pp.419–420).Google Scholar
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    See Blanchard (1997, p. 418).Google Scholar
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    Compare in this respect e.g. Rotemberg and Woodford (1992), where, however, also the goods supplied by the oligopolists on a single market are near but not perfect substitutes. Another example is the model of D’Aspremont, Dos Santos Ferreira and Gérard-Varet (1995).Google Scholar
  7. 7.
    This designation was chosen by Rotemberg (1987) and refers to the initials of the authors of the most important contributions in this respect, namely Parkin (1986), Akerlof and Yellen (1985) and Mankiw (1985).Google Scholar
  8. 8.
    We shall numerically only investigate situations where this rate of profit is positive which implies that dividend payments will stay positive along the considered trajectories.Google Scholar
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    Note here again that the expressions for l have been defined by means of xL/K in order to measure labor in efficiency units, here equal to their output performance.Google Scholar
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    The following is a short-cut of the model that Carlin and Soskice (1990) present on pp.388ff.Google Scholar
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    See Dixit and Stiglitz (1977), Blanchard and Kiyotaki (1987) or Weitzman (1985) in this regard, to mention only a few.Google Scholar
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    Note, however, that the empirical evidence on this is far from being clear-cut. So, e.g., a number of studies have also come to the result of a procyclical markup; a similar controversy exists also about the behavior of the marginal costs, see Layard, Nickell and Jackman (1991, pp.339 ff.Google Scholar
  13. 15.
    Similar expositions can be found, e.g., in Layard, Nickell and Jackman (1991), see their chs. 1 and 8.Google Scholar
  14. 18.
    The parabola separates cyclical (above) from monotonic behavior (below).Google Scholar
  15. 21.
    We thank Thorsten Göke for the calculation of figure 6.5 as an application of a program he has developed for the numerical determination of stable manifolds of fixed points and more general situations.Google Scholar
  16. 22.
    Note that there now exists a third steady state solution S1 and that all points between W and S 1 are now steady states too — due to the form of the lower part of our patched dynamical system for Δµ = 0.Google Scholar
  17. 23.
    We add here that output and employment will stay positive along this dynamics if for example a 0 > 0 is assumed and that the underlying IS-LM model can be specified in such a way that the nominal rate of interest will stay positive, too.Google Scholar
  18. 24.
    The observation from numerical simulations is that the separatrix S will connect the points S 0, W in a cyclical or monotonic way in the case of local instability.Google Scholar
  19. 25.
    Note that the separatrix not exists in the domain where the kink in the Phillips curve is operative.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2000

Authors and Affiliations

  • Carl Chiarella
    • 1
  • Peter Flaschel
    • 2
  • Gangolf Groh
    • 3
  • Willi Semmler
    • 2
    • 4
  1. 1.Sydney School of Finance and EconomicsUniversity of TechnologySydneyAustralia
  2. 2.Faculty of EconomicsUniversity of BielefeldBielefeldGermany
  3. 3.Faculty of EconomicsUniversity of MagdeburgMagdeburgGermany
  4. 4.Department of EconomicsNew School UniversityNew YorkUSA

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