General Equilibrium Analysis of Imperfect Competition: An Illustrative Example

While Kenneth Arrow’s contribution to the general equilibrium analysis of perfect competition is so fundamental that the standard model bears his name, he has also been one of the leaders in developing the analysis of imperfect competition in a general, multimarket framework. Indeed, in 1967 he labelled the failure to incorporate imperfect competition into the neoclassical general equilibrium model as one of the major ‘scandals’ of equilibrium theory (Arrow, 1967, p. 734), and by 1971 he published two path-breaking pieces, ‘The Firm in General Equilibrium Theory’, Arrow (1971), and ‘General Equilibrium Under Alternative Conditions’, which constituted Chapter 6 of Arrow and Hahn (1971). Moreover, in part under Arrow’s influence, over the next few years, a number of other authors also developed general equilibrium models with imperfectly competitive elements.1