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Does Imperfect Competition Imply Pareto Inefficiency?

Author

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  • Lars Haagen Pedersen

    (Institute of Economics, University of Copenhagen)

  • Peter Stephensen

    (Institute of Economics, University of Copenhagen)

Abstract

In this paper we consider a model where agents optimize intertemporally and in which there is imperfect competition in the market for consumer goods. The labor market is one of perfect competition and there is exogenous labor supply. In other factor markets there may or may not be imperfect competition. Using CES utility and investment technology functions, we are able to aggregate the model to get a simple dynamic system. We show that if imperfect competition only appears in the market for consumer goods then the equilibria are Pareto efficient. However, if imperfect competition prevails in the factor markets as well, then the equilibria will be Pareto inefficient. In this case the degree of inefficiency depends on the size of the elasticity of substitution in the investment technology function. As this elasticity approaches infinity the equilibria becomes Pareto efficient. In this way the result is a generalization of the wellknown Abel & Blanchard result (Econometrica, 1983) that in a model with perfect competition and intertemporally optimizing agents the decentralized equilibria are Pareto efficient.

Suggested Citation

  • Lars Haagen Pedersen & Peter Stephensen, 1990. "Does Imperfect Competition Imply Pareto Inefficiency?," Discussion Papers 90-07, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:9007
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