Marketing Costs and Imperfect Competition in General Equilibrium

Abstract

General equilibrium theory has made substantial progress in untangling the logic of how a market can coordinate individual actions. This progress has been based, however, on a pristinely abstract concept of a ‘market.’ This ‘ethereal construct’ [1, p. 3] was some sort of wondrous void (or black box) from which sprang prices to which all agents had equal access. This paper makes a tentative effort to enlarge the notion of a market in this theory. It extends earlier efforts (e.g. [6] and [8]) to make transactions and merchandising costs explicit in general equilibrium models. More basically, it attempts to allow explicitly for the fact that markets, too, are controlled by optimizing agents. In so doing, it is impossible to avoid the problem of how to describe imperfectly competitive solutions. Thus these agents may maintain more than one market in which to trade some commodity and the same ‘good’ may have different prices in different markets in equilibrium — both because of price discrimination and because of differing merchandising costs for different types of traders. In summary, this paper starts work on a model which permits the simultaneous determination of the nature of trading arrangements and of prices. The next section of this paper describes the types of markets allowed for in this model. Section 3 presents the formal definition of this paper’s model of markets. Section 4 makes a translation of this model into the standard Arrow-Debreu model of equilibrium. This is useful technically and it makes apparent the way in which this model extends the Arrow-Debreu analysis. Finally, Section 5 discusses a new solution concept which is suggested by this model.