Does Imperfect Competition Imply Pareto Inefficiency?
Author InfoLars Haagen Pedersen (Institute of Economics, University of Copenhagen) Peter Stephensen (Institute of Economics, University of Copenhagen) Abstract In this paper we consider a model where agents optimize intertemporally and in which there is imperfect competition in the market for consumer goods. The labor market is one of perfect competition and there is exogenous labor supply. In other factor markets there may or may not be imperfect competition. Using CES utility and investment technology functions, we are able to aggregate the model to get a simple dynamic system. We show that if imperfect competition only appears in the market for consumer goods then the equilibria are Pareto efficient. However, if imperfect competition prevails in the factor markets as well, then the equilibria will be Pareto inefficient. In this case the degree of inefficiency depends on the size of the elasticity of substitution in the investment technology function. As this elasticity approaches in
