Imperfect competition

The conventional view about the relationship between Keynesian theory and the theory of imperfect competition is that they developed within two close parallel and non-interacting streams. However, although market power is admittedly not the key for the general theory of employment, it cannot be put completely aside without threatening the understanding of Keynes's approach. This is true of his treatment of the labour market in the Treatise on Money, and later in the General Theory. No theory of unemployment, other than frictional, seems compatible with the perfect competition paradigm. In the General Theory, market power extends to output markets even if the role it plays in this context makes its presence less compelling than in the labour market. At least, so it seemed before the so-called Dunlop-Tarshis observation, after publication of the General Theory, forced Keynes to take output market power more seriously, by considering the possibility either of decreasing marginal costs or of decreasing mark-ups on marginal cost.