Someone asked if the monopolistic competition theory was going to appear in
Brad's text. I would guess not, since it's a macro textbook and MC is seen
as a micro topic. But it should appear, since it is the normal form of
markets (except for the bits about equilibrium and the common assumption of
homogeneous competitors, in terms of cost structures) when there is no
oligopolistic interdependence. Arrow pointed out years ago that since
there's no Auctioneer to set prices, firms and consumers do it.
(Nonetheless, economists, who usually love their Nobel-prize winners,
ignore his point.)
Price-taking is silly except as a first approximation in some markets in
finance. Most importantly, in discussion of a macro textbook, it gets us
away from the notions of "inflationary expectations" that occur in the
NAIRU literature. It's true that expectations play a role, but so do
institutional forces such as the price/wage spiral and wage/wage inflation.
That's why I replace "inflationary expectations" with the formally similar
notion of an inflationary hangover, which includes the
objective/institutional factors along with the subjective factors. This
allows for slow adjustment of the hangover, along with the ratchet effect
(inflationary hangover rising more easily that it falls, unless there's a
big or sustained recessionary impulse).
Of course, as Michael Perelman argues in his NATURAL INSTABILITY OF
MARKETS, the degree of competition varies historically. After the
neoliberal policy revolution, more of the world has been forced into the
pure market strait-jacket, so institutional factors play a smaller
role (which naturally enough encourages instability).
>Say, rather, that demand for books is highly inelastic once the professor
>has adopted it, and that total $$$ spent by students doesn't play a large
>role (it does play some role) in the professorial adoption decision.
>
>Publishers and editors will say that although they use their local
>post-adoption monopoly power to the fullest to extract revenue from
>students, they and their companies don't get to keep it. They compete for
>course adoptions by spending more and more money on supplements and
>add-ons that they hope will make the professor happy, and make him or her
>adopt the book.
>
>This is a highly dissipative activity: the value of the supplements to the
>professor is much less than the cost to the students of the money spent
>producing them. It is a perfect illustration of how monopolistically
>competitive markets with entry do not produce anything like the social
>optimum...
>
>
>Brad DeLong
>
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
