AGGREGATE SHOCKS UNDER IMPERFECT COMPETITION

In economies with imperfect competition, demand externalities can generate multiplier effects. The paper analyses the nature of these demand externalities. The positive feed-back effects created by externalities suggest that shocks in the economy will be magnified via the spillover effects and therefore, imperfectly competitive economies will be more volatile than a perfect competitive economy. It is shown that this notion will not be true in general. Under plausible conditions, output fluctuations will be smaller, price fluctuations larger than in perfectly competitive environments.