Unemployment equilibrium and economic policy in mixed markets☆

a r t i c l e i n f o This paper features a simple static Cournot–Nash model of an exchange economy with two productive sectors at flexible prices and wages. The traders in the atomless sector are price-takers, while the atoms behave strategically. We focus on the consequences of strategic interactions on the market outcome. Firstly, strategic interactions create underemployment on the labor market. Secondly, when the number of atoms increases without limit, the CWE coincides with the competitive equilibrium. Thirdly, we compare the welfare reached by traders at both equilibria. Fourthly, we consider the implementation of a tax levied on strategic supplies. Finally, we compare the approach retained with the monopolistic competition framework. A vast literature has been devoted to un(der)employment equilibrium without rigidities in a partial equilibrium framework (Cahuc and Zylberberg, 2004). 1 The motivations in this paper are twofold. Firstly, it aims at providing a conceptual framework into which the determination of market general equilibrium outcome is based on strategic interactions at flexible prices and wages. Secondly, it analyzes the working and the consequences of the strategic interactions within a sector on a perfectly competitive sector with a labor market. This paper therefore considers a simple static Cournot– Nash model of an exchange economy with two productive sectors. Two main approaches model strategic interactions in general equilibrium. First, the strategic market games consider decentralized and by d'Aspremont et al. (1997) for pure exchange economies, considers a market clearing price mechanism together with a non cooperative game on quantities. This literature focuses on the consequences of market power in general equilibrium. More specifically, the CWE models make the equilibrium prices and the allocations the results of a market price mechanism in strategic multilateral exchange. As a consequence, the market demand which addresses to each producer is made endogenous. We here propose to investigate the question of underemployment equilibrium in strategic multilateral exchange with competition à la Cournot–Walras. Many models deal with un(der)employment in general equilibrium under imperfect competition without rigidities. Models of cooperation failures put forward un(der)employment equilibrium. Inefficiencies may be caused by local market power of firms and consumers, which stems from the fact that all goods (and all labors) are imperfect substitutes (Blanchard and Kiyotaki, 1987; Layard et al., 1991), or that some deficiency of aggregate demand occurs (Hart, 1982; d'Aspremont et al., 1989, 1990). Monopolistic competition models do not provide microfoundations which explain …