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Market, Trade, and Welfare in General Equilibrium

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Macroeconomics, Trade, and Social Welfare

Part of the book series: Advances in Japanese Business and Economics ((AJBE,volume 14))

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Abstract

The recent theoretical research in economics has paid much attention to imperfect competition and increasing returns to scale, uncovering new and useful findings about the market behavior of firms and their implications for economic welfare. More often than not, the analysis of these phenomena has been carried out within the framework of partial equilibrium models. This is a notable, and perhaps inevitable, turnabout from the dominance of general equilibrium analysis in the 1950s to 1970s. The traditional general equilibrium models à la Arrow and Debreu (1954) and McKenzie (1959) are appropriate for the proof of the existence of general equilibrium, but their generality restricts the comparative-static (or dynamic) analysis of practical economic problems even under the assumption of perfect competition. The same comment applies, a fortiori, to Negishi’s (1961) ingenious extension of the Arrow–Debreu model to the case of monopolistic competition. Although partial equilibrium models are useful for the analysis of a single industry (or a set of closely related industries), they are inadequate in addressing its relationships with the rest of the economy, both through their negligence of income effects and because of their loose recognition of the inter-industry flow of resources. I need to develop tractable general equilibrium models incorporating imperfect competition and increasing returns at the expense of generality. The present chapter takes a small step forward in this direction.

The original version of this chapter is taken from Ohyama (1999), which is a refined manuscript of the Presidential Address to the Japanese Economic Association held at Ritsumeikan University, Kusatsu, September 1998. It is adapted to refresh style and presentation.

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Notes

  1. 1.

    In the words of Jones (1965, p. 557).

  2. 2.

    Perhaps, I should also cite Jones (1968), Negishi (1969), Ethier (1982), and Kemp and Schiinberger (1991), who considered the implications of increasing returns as the result of external economies . Their models are, however, best interpreted as those of perfect competition .

  3. 3.

    See Helpman (1984) for a survey , and Helpman and Krugman (1985) for a systematic exposition of alternative models of imperfect competition and international trade . Kemp (1995) contains a number of his contributions to the subject.

  4. 4.

    A firm is envisaged here as an indivisible unit of production in each industry dependent on the nature of technology and required managerial resources.

  5. 5.

    Each cartel may be regarded as a large firm consisting of several indivisible units of production; see fn. 4.

  6. 6.

    m is usually referred to as the coefficient of conjectural variations. Here it is construed as the number of firms that collude in their decision of output. See Seade (1980) for this interpretation .

  7. 7.

    Firms must perceive a subjective demand function in some form or another when they behave as price-setters. See Negishi (1961) for use of subjective inverse demand functions in the proof of the existence of general equilibrium under monopolistic competition. See also Nikaido (1975) for a critique of this approach.

  8. 8.

    Furthermore, it is implicitly assumed here that firms wish to collude as extensively as possible to maximize their short-run profits.

  9. 9.

    See Appendix A of Ohyama (1999) for a proof .

  10. 10.

    See Appendix B of Ohyama (1999) for a proof.

  11. 11.

    This assumption would be redundant if I could assume the existence of fiat money serving as a common accounting unit and define the price elasticity of demand appropriately. See Das (1982) for a similar argument .

  12. 12.

    This assumption is ill founded when consumers are possessed of a common homothetic utility function.

  13. 13.

    See Chang (1979), Ethier (1984), and Takayama (1982) for discussions .

  14. 14.

    The subjective demand function perceived by individual firms need not coincide with this “objective” demand function.

  15. 15.

    In the words of McKenzie, “it is not unreasonable to consider the constant returns model as the truly general competitive model, approximating to the situation with freedom of entry and firms which are considered to be small compared to their industries.”

  16. 16.

    See Appendix C of Ohyama (1999) for the derivation of Eq. (11.18).

  17. 17.

    For instance, see Mankiw and Whinston (1986) and Suzumura and Kiyono (1987) for partial equilibrium analyses. Konishi et al. (1990) provided a proof for the theorem in a simple general equilibrium model with the representative consumer possessing a quasi-linear utility function .

  18. 18.

    Most of the novel results from new trade theory are obtained in short-run equilibrium models in which the number of firms is fixed in imperfectly competitive industries. For trade policy implications of new trade theory, see Krugman (1987), Helpman and Krugman (1989), and Chang and Katayama (1995).

  19. 19.

    See Appendix D of Ohyama (1999) for the exact analysis of the two-by-two case.

  20. 20.

    We discussed international coordination of entry policies in a different setting using a simple model of increasing returns and monopolistic competition : see Ohyama (1997).

  21. 21.

    See Krugman (1987) for some examples.

  22. 22.

    See Ohyama (1993) for an attempt to analyze the short-run equilibrium in the two-by-two case.

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  1. Professor Emeritus, Keio University, Tokyo, Japan

    Michihiro Ohyama

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Ohyama, M. (2016). Market, Trade, and Welfare in General Equilibrium. In: Macroeconomics, Trade, and Social Welfare. Advances in Japanese Business and Economics, vol 14. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55807-1_10

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