Imperfect Information, Monopolistic Competition, and Public Policy

Abstract

[Introduction] Ever since the pioneering work of George Stigler (1961) and the provocative survey by Michael Rothschild (1973), economists have recognized that general equilibrium models yield competitive equilibria only by making strong assumptions about the information available to market participants. In response to this difficulty, theorists in recent years have developed a family of "search equilibrium models" that presuppose homogeneity and the absence of price discrimination, and which also assume that information acquisition costs are positive for at least a subset of buyers. On the basis of these and other assumptions, the models attempt to show how price dispersion equilibria can arise solely as a result of the strategies that firms and consumers pursue. One author summarized the results: "if information is costly, each small firm obtains market power" so that "The relevant market structure with imperfect information is not per/ ect competition but rather monopolistic competition" (Steven Salop, 1976, p. 240).