Price Taking as the Asymptotic Limit of Strategic Behavior

It is widely accepted among economists that in a system of markets where individual participants are small relative to the market size, individuals have a negligible effect on the determination of market outcomes, so they may be thought of as exhibiting a ’price taking’ behavior. Of course, in order to make sense of this statement one has to attach a meaning to ’a small individual relative to market size’. In this way it would be possible to distinguish when price taking is a reasonable assumption and when it is not. The significance of the price taking hypothesis in economics calls for a formal clarification of this point -a ’theory of competition’ so to speak.