Wilhelm Neuefeind

General Equilibrium When Some Firms Follow Special Pricing Rules

IN THIS PAPER, we study the existence of a general equilibrium in an economy in which some of the firms behave competitively, whereas others follow special pricing rules. An even casual observation of economic reality confirms the need for the inclusion of price setting firms in the study of general equilibrium models. And, in fact, this has been emphasized in the economic literature for some time. We consider this a sufficient justification to present a general equilibrium model which allows for both types of behavior-price setting as well as price taking behavior. The model to be presented will account for a wide range of price setting rules. We, however, find it appropriate to point out at the start that not all economically relevant price setting rules are covered. Although our model permits the drawing of useful conclusions for the general equilibrium theory of oligopolistic competition through prices, it is not especially designed for that purpose. In particular, our results are not applicable to the general equilibrium analysis with price making monopolistic firms, a subject on which there exists some literature.2 Our motivation as well as our modelling options and assumptions are directed to two fields where an increased interest in the theoretical foundations recently could be noticed.

Quantity guided price setting

Abstract We consider an economy with two sectors. The first sector consists of competitively behaving consumers and producers; the second, non-competitive, sector, the P-sector, consists of firms (P- firms) producing commodities (P-goods) that are not produced in the competitive sector. The P- firms receive their gross output levels and the market prices of their inputs as decision parameters. They minimize costs and set prices for their outputs according to a specific pricing rule. There is also a planning agency that ensures that a certain net production (gross production minus the intra-consumption in the P-sector) of the P-goods is achieved. We give assumptions assuring the existence of equilibrium which requires market clearing, meeting the production aspirations of the planning agency, and setting prices for the P-goods which are compatible with market prices in the sense that the market prices cannot be higher than the prices to be charged by the P-firms, and if the target for a P-good is exceeded, the price charged by the P-firm equals the market price.