A non-walrasian general equilibrium model with monopolistic competition and bargaining

Abstract

In a general equilibri~m framework, this paper tries to reproduce an important stilized fact of real economies: firms set prices under demand uncertainty while consumption decisions are taken when prices are already known. Under these conditions, there is place for a quantity rationing equilibrium since preferences are revealed when prices are already set and market-clearing can not be attained through changes in prices. "Demand heterogeneity" is introduced in the model and related to "demand uncertainty": when firms set prices, their own market shares are not known with certainty, even if aggregate demand and the distribution of market shares are common knowledge. The main properties of the aggregate equilibrium are: (a) some markets are demand constrained while other markets are supply constrained, (b) aggregate production is smaller than aggregate demand and full-employment output, (c) there is (involuntary) unemployment, and (d) effective demand is greater than notional demand, implying a positive spill-over effect.