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.