Introduction

The importance of imperfect competition has long been recognized in many areas of economics, perhaps most obviously in industrial economics and in the labour economics of trade unions. Despite the clear divergence of output and labour markets from the competitive paradigm in most countries, macroeconomics where it has used microfoundations has tended to stick to the Walrasian market-clearing approach. However, over the last decade a shift has begun away from a concentration on the Walrasian price-taker towards a world where firms, unions and governments may be strategic agents. This chapter takes stock of this burgeoning literature, focusing on the macroeconomic policy and welfare implications of imperfect competition, and contrasting them with those of Walrasian models.

We seek to answer three fundamental questions. (1) What is the nature of macroeconomic equilibrium with imperfect competition in output and labour markets? With monopoly power in the output market causing price to exceed marginal cost, and union power leading to the real wage exceeding the disutility of labour, we would expect imperfectly competitive macroeconomics to have lower levels of output and employment than Walrasian economies, a Pareto inefficient allocation of resources, and the possibility of involuntary unemployment. Few would disagree that deviations from perfect competition will probably have undesirable consequences. (2) To what extent can macroeconomic policy be used to raise output and employment in an imperfectly competitive macroeconomy? (3) If policy can raise output and employment, what will be the effect on the welfare of agents?