Comment on E. Dierker and B. Grodal, “Modelling Policy Issues in a World of Imperfect Competition”

The paper by Egbert Dierker and Birgit Grodal is a challenging one. As a piece of economic theory it is a nice example of the fine "Copenhagen tradition" in mathematical economics. This tradition has always excelled in detailed and rigorous analysis; this paper makes no exception to these standards. The twofold goal of the paper is to offer a systematic perspective and propose a resolution to an old challenge in general equilibrium theory. The issue concerns the proper objective of the firm under imperfect competition. As is well known, general equilibrium models with imperfect competition can face fundamental problems, when one moves to more general frameworks than the simple models that have been used in much of the applied and partial equilibrium literature. In earlier work it has been found that the notion of profit maximization is not well founded for many such models. Only in special cases can it be justified. At a general level the problem concerns both existence and number of equilibria. This issue can have serious consequences, as the set of equilibria can change dramatically in conjunction with the choice of the normalization or, using standard jargon, the choice of the unit of account. We are accustomed to thinking that the choice of measuring rod is not of great economic significance, but this paper and the related literature suggest that this is not so. Taken literally, it would say, for example, that by itself creation of the Euro could dramatically alter the economic outcome in Europe because of different prices indices and so on.' Another example is the choice of invoicing currencies in international trade deals. If the problem in the paper is a real one, then these invoicing choices could have dramatic consequences. The paper and the associated technical literature do not stop at illustrations of the problem. This is indeed as it should be. Many of us probably