A Two Good GE Model with Imperfect Competition and Perfect-Foresight: An Example

Abstract

In this paper we consider a two good general equilibrium model with one good being produced from the other and being sold in an oligopolistic market. We assume that the representative consumer has a Cobb-Douglas utility function and the firms face constant unit cost of production. We show that an equilibrium with self fulfilling expectations for the oligopolists exists. We study the effect of entry of firms in the oligopoly. We observe that as more firms enter the market price of the produced good decreases, its total output increases and the total profit of this sector decreases. Further with the arrival of new firms the consumption of the non-produced good decreases. In addition we show that as more firms enter the representative consumer is better off than before. As the number of firms goes to infinity, the equilibrium outcomes for the economy converge to the competitive equilibrium for the two good economy.

Keywords: two goods, general equilibrium, Cobb-Douglas utility function, oligopoly, perfect foresight

JEL Classification: D43, D58