A REVOLUTION IN MICROECONOMIC ANALYSIS? A REVIEW ARTICLE
| Author | G. H. Paul |
| Date | 01 February 1992 |
| DOI | http://doi.org/10.1111/j.1467-9485.1992.tb00610.x |
| Published date | 01 February 1992 |
Scorrish
Journal
01
Polirical
Economy.
Vol.
39.
No.
I.
February
1992
:
1992
Scouirh
Economic
Socicly
A REVOLUTION IN MICROECONOMIC
ANALYSIS? A REVIEW ARTICLE
PAUL
G.
HARE
Department
of
Economics, Heriot- Watt University, Edinburgh
I
INTRODUCTION
In the 19905, microeconomics can no
longer credibly be taught as it was pre-
viously, dominated by the paradigms
of
the familiar perfect competition and mon-
opoly models. For students, the changes in
the subject, as reflected in the books to be
reviewed in this article, are surely
to
be
welcomed, since the sterility and nar-
rowness
of
some
of
the earlier models has
given way to
a
rich diversity
of
models
capable
of
analyzing many problems not
previously subjected to fruitful economic
analysis. This diversity is based on some
new technical apparatus, notably the use
of
important insights from game theory
(which give rise
to
various models
of
strategic interaction between firms), and
models
of
evolution and adaptation.
Hence for teachers
of
economics, the new
developments in microeconomics may
present more of a challenge, since much
that was familiar has
to
be discarded or
modified, and a great deal
of
new (and in
my view exciting) material has
to
be
assimilated.
It
has been understood for a long time
that the theory
of
the firm was
a
serious
weakness
of
the traditional micro-
economics; indeed several texts and mono-
graphs attempted
to
address the problem,
though usually without escaping from the
limitations
of
the traditional approach.
As
is now apparent, the real problem resided
not
so
much in the firm’s internal structure
and behaviour, but rather in the modelling
of
the competitive environment in which it
functions. This is where the recent work
has made such an important contribution.
Of the five books reviewed here, three
focus entirely on the firm in its environ-
ment (these are Jacquemin, 1987; Tirole,
1988; Krouse, 1990). The fourth, Kreps
(1990a), also provides an excellent over-
view
of
the theory
of
the household and
of
general equilibrium theory, but these fall
outside the scope
of
this article. The fifth
book, Kreps (1990b),
is
a
more philo-
sophical account
of
equilibrium concepts
used in game theory. It
is
included here for
its relevance to one section
of
the review.
(One of the authors reviewed here, Tirole,
recently published a full appreciation
of
Kreps (see Tirole, 1990), which includes
topics outside the scope of this article.) In
terms
of
their technical level, all five books
make use
of
a mixture
of
diagrams and
at
most some reasonably simple algebra (in-
cluding some calculus), which should
make them accessible at least
to
thc more
advanced UK undergraduates; they will
also be useful for many postgraduate
courses.
Rather than summarise the contents
of
these books,
I
have chosen
a
limited
number
of
issues through which
to
illus-
trate their approach. Section
I1
outlines
the new equilibrium concepts developed in
game theory models (Tirole, ch. 11;
Krouse, ch. 9; Kreps, 1990a, chs.
I1
and
12;
Kreps, 1990b), and in models
of
selec-
tion and adaptation (Jacquemin, ch. 2).
Then in Section
III I
examine the pro-
blems
of
entry and exit (Jacquemin, ch.
4;
Tirole, ch.
8;
Krouse, ch.
10;
Kreps,
1990a, sect. 13.2). and in Section
IV
the
economics
of
research and development
(Tirole, ch. 10; Krouse, ch.
I).
Section
V
presents some brief conclusions.
II
EQUILIBRIUM
CONCEPTS
Contrary
to
what was implied above, the
concepts introduced here are not really
new in themselves; but their systematic
application
to
the rapidly developing field
of
industrial economics is, and this
justifies the present discussion.
As
numerous examples
of
particular models
make clear, the most useful equilibrium
notion for the non-cooperative games used
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