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Perfect Competition and the Creativity of the Market

  • Joseph M. Ostroy
  • Louis Makowski

From the perspective of the Walrasian general equilibrium model, entrepreneurial and opportunistic behavior seems foreign. Can the model be refashioned so that it can accommodate such behavior? Many would say no, but we argue the contrary. Indeed, we present a reformulation of the model that serves as a gateway to, rather than a detour from, such contemporary issues as innovation and incentives. The trick is to reexamine what perfect competition means. Starting with an historical summary of general equilibrium, we sketch an image of the perfect competitor as an active market opportunist, seeking out profit potentials wherever he can.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jel.39.2.479
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Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 39 (2001)
Issue (Month): 2 (June)
Pages: 479-535

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Handle: RePEc:aea:jeclit:v:39:y:2001:i:2:p:479-535
Note: DOI: 10.1257/jel.39.2.479
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  1. Adam Brandenburger & Harborne Stuart, 2007. "Biform Games," Management Science, INFORMS, vol. 53(4), pages 537-549, April.
  2. Samuel Bowles & Herbert Gintis, 1993. "The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 83-102, Winter.
  3. Judith R. Gelman & Steven C. Salop, 1983. "Judo Economics: Capacity Limitation and Coupon Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 315-325, Autumn.
  4. Hart, Oliver D, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 1-30, January.
  5. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  6. Makowski, Louis & Ostroy, Joseph M., 1987. "Vickrey-Clarke-Groves mechanisms and perfect competition," Journal of Economic Theory, Elsevier, vol. 42(2), pages 244-261, August.
  7. Ostroy, Joseph M., 1980. "The no-surplus condition as a characterization of perfectly competitive equilibrium," Journal of Economic Theory, Elsevier, vol. 22(2), pages 183-207, April.
  8. Makowski, Louis, 1980. "A characterization of perfectly competitive economies with production," Journal of Economic Theory, Elsevier, vol. 22(2), pages 208-221, April.
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