IGIDR Lectures: February 2010

COMPETITIVE MARKETS: THEORY AND POLICY

Anjan Mukherji

Centre for Economic Studies and Planning

Jawaharlal Nehru University

One of the basic paradigms underlying current economic policy rests on the properties of competitive markets. It is only recently that policy makers have woken up to the fact that matters are not as straightforward as they have been taken to be and we need to reconsider many of commonly held beliefs in this connection. These lectures are designed to address this basic problem. As will become apparent, our approach will provide a route-map of the various sub-themes that need to be negotiated to identify the possible steps which need to be taken in this connection. Accordingly, with this objective in mind, the four lectures have been designed as follows:

Lecture 1:  Competitive Markets: Foundations

This lecture will discuss the main reasons for the fascination of the profession with the notion of competitive equilibrium and why competitive markets are at all of any interest. It will be argued that these fundamental results make sense only if two propositions, usually left implicit, hold. These are related to the attainment of competitive equilibrium and competitive behavior at equilibrium.

Lecture 2: Competitive Markets: Price Formation

We take up the question of attainment of equilibrium in this lecture. There are two aspects to this question: how do prices behave when markets do not equilibrate and once this rule is identified we need to investigate why such a rule should work. We also look at recent work involving experiments carried out at Caltech and their implications for this issue.

Lecture 3: Competitive Markets: Regulation

Is competitive behavior incentive compatible? This is the central question of this lecture. In fact the answer to this question is of crucial importance; for if individuals find that it is in their best selfish interest to renege from competitive behavior then policies based on competitive behavior are doomed. Moreover if other agencies have to be involved in maintaining competitive behavior, why should they do so?

Lecture 4: Competitive Markets: Values and Distribution of Income

The Last lecture of the series will try to look at the implications of our analysis.  Generally it is believed that one of the attractions of the theory of competitive markets is that it is ‘value-free’ and independent of any property of the distribution of income  (or purchasing-power, or resources). We examine the veracity of this belief and we see that this is indeed not quite correct. Implications of our investigations for policy formulation will be examined.