Knowledge that Transforms

Christopher J. Heady, Pradeep K. Mitra; The Computation of Optimum Linear Taxation, The Review of Economic Studies, Volume 47, Issue 3, 1 April 1980, Pages

Considerable attention has been devoted in recent years to the study of markets which are quasi-competitive in the sense that they retain the notion of a large number of firms selling a homogeneous product, but depart from perfect competition in relaxing the assumption that consumers are perfectly informed as to the prices of the various firms. The initial surge of interest in this type of model was motivated by the need, first noted by Arrow (1956), to deal with the firm, even in a competitive environment, as a price setter, in order adequately to tackle the analysis of disequilibrium behaviour. Thus early work in the field, beginning with Fisher ((1970), (1972), (1973)) focussed on the question of whether an initial market distribution of prices would, over time, converge to a unique equilibrium price. More recent work has, however, developed the idea that market equilibrium might be characterized by a persistent distribution of prices. That this is more reasonable in the light of the variety and volatility of prices (which is) the commonplace of our experience was argued by Rothschild (1973). A further, and theoretically more compelling, reason for exploring this question, however, is provided by what is probably the most striking aspect of the literature on these markets: the fact that for a very wide range of apparently quite reasonable assumptions, the distribution of prices converges to the monopoly price (Diamond (1971), Hey (1974)). Indeed, where prices do converge, they converge to the competitive price only under very strong conditions: for example, where firms are artificially constrained to behave as if they were perfect competitors (Fisher, Rothschild, op. cit.). Thus it would seem that in order to tackle the question of whether, under conditions of imperfect price information, any competitive features of the market may be preserved, we are compelled to examine market equilibria of this more general class. Such price dispersion as is empirically observed in many markets undoubtedly owes its origin to a wide range of contributory factors. This suggests representing the firm as experiencing a succession of exogenous random shocks, as in Lucas and Prescott (1974). An alternative approach is to explore the possibility that firms set a range of suboptimal prices via their various estimates of actual demand conditions, as deduced by following an optimal estimation procedure (stopping rule), as explored by Rothschild (1974). More germane to our present concerns as to whether the range of actual prices, or their average, might be drawn by competitive pressures below the monopoly price, is the more recent work which begins from the notion that consumers differ in their costs of acquiring information, so that firms partition themselves permanently into subgroups patronized predominantly by different mixtures of consumer types; the better informed consumers being associated, as it were, with the lower price firms . (Salop and Stiglitz (1978), Axell (1977).) The present model adopts a rather different type of approach; we aim to model equilibrium in the quasi-competitive economy as an ongoing process, in which firms continually compete with each other to increase their respective sales to a number of identical customers.

As Oliver Hart (1975) has forcefully shown, economies with incomplete markets can have surprising welfare properties. These examples, or counter-examples, bring out the need for further analysis of public policies in the presence of uncertainty and incomplete markets. Various policies are examined here in simple models with two goods, two types of agents, and two states of nature. The basic model has an ex ante decision by suppliers, made with rational expectations, followed by a competitive exchange economy after the state of nature is known. The paper analyses the changes in expected utilities of demanders and suppliers from small changes in the ex ante decision away from the competitive equilibrium. Such changes generally have the potential of increasing the sum of expected utilities and can result in a Pareto improvement. The paper focuses on distinguishing between situations where the gain comes from stabilizing output across states of nature and those where the gain comes from destabilizing. Then two policies are examined which work on the ex post market-use of taxes and subsidies to stabilize suppliers' incomes and use of government demand policy to maximize social welfare.

Journal Article Rational Expectations and the Non-neutrality of Systematic Monetary Policy Get access David K. H. Begg David K. H. Begg Oxford University Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 2, January 1980, Pages 293–303, https://doi.org/10.2307/2296993 Published: 01 January 1980 Article history Received: 01 December 1977 Accepted: 01 November 1978 Published: 01 January 1980

Leslie Young, James E. Anderson; The Optimal Policies for Restricting Trade under Uncertainty, The Review of Economic Studies, Volume 47, Issue 5, 1 October 198

Gwyn Aneuryn-Evans, Angus Deaton; Testing Linear versus Logarithmic Regression Models, The Review of Economic Studies, Volume 47, Issue 1, 1 January 1980, Pages

Journal Article A Model of Wage-Price Inflation Get access J. D. Sargan J. D. Sargan London School of Economics and Political Science Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 1, 1980, Pages 97–112, https://doi.org/10.2307/2297105 Published: 01 January 1980

Journal Article The Consumer Price Equation in the Post War British Economy: An Exercise in Equation Specification Testing Get access J. D. Sargan J. D. Sargan London School of Economics and Political Science Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 1, 1980, Pages 113–135, https://doi.org/10.2307/2297106 Published: 01 January 1980

Journal Article Symmetry Conditions for Market Demand Functions Get access W. E. Diewert W. E. Diewert University of British Columbia Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 3, April 1980, Pages 595–601, https://doi.org/10.2307/2297310 Published: 01 April 1980 Article history Received: 01 January 1977 Accepted: 01 August 1979 Published: 01 April 1980

Journal Article Direct and Indirect Trade Utility Functions Get access A. D. Woodland A. D. Woodland University of British Columbia Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 5, October 1980, Pages 907–926, https://doi.org/10.2307/2296921 Published: 01 October 1980 Article history Received: 01 April 1979 Accepted: 01 March 1980 Published: 01 October 1980