A Model of Imperfect Competition with Keynesian Features

The recent literature on “the reappraisal of Keynes” has viewed Keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities. One problem with this approach is that it lacks a theory of price determination—in particular, of why prices are fixed. In the present paper, we show that a number of Keynesian features arise in a model in which prices are fully flexible, but where agents have some monopoly power. One advantage of this approach is that it provides a theory of the determination of both prices and quantities.