Efficiency and imperfect competition with incomplete markets

We deal with the problem of providing incentives for the implementation of constrained optimal outcomes in a two-period economy with incomplete markets. Allowing both for price observation, price-manipulation and a minimal amount of coordination enables to recover (second-best) efficiency at equilibrium, therefore to do better than perfect competition. To make this point, we construct a feasible price-quantity mechanism for two-period economies. In the absence of monitoring between the first and the second period, one gets a full implementation of the (typically inefficient) GEI equilibria via Nash equilibria. By contrast, when actions are observed between the two periods, a large subset of feasible and individually rational allocations can be obtained as strategic equilibria. Furthermore, the correspondence of individually rational, second-best efficient outcomes is implemented via undominated Nash equilibria (NE). (C) 2003 Published Elsevier Science B.V.