In this chapter we study models of imperfect competition. These economies display complementarity from a very simple mechanism. If others in the economy are producing more output, then they will be spending more as well and this induces increased demand for the product of an individual producer. Generally, the response of the producer will be to increase output as well. The linkage across agents is thus the familiar income–expenditure relationship common to many “Keynesian” style models of price rigidities. However, these interactions do not require price rigidities as they derive simply from the assumed normality of goods. In fact, this type of linkage across agents is present in general equilibrium models without any distortions whatsoever. As we shall see, though, these interactions are much more powerful in imperfectly competitive economies. In particular, the income–expenditure linkages can create multipliers and, when combined with nonconvexities in technology, can lead to multiple, Pareto–ranked equilibria.

The exact specification of market structure is, of course, quite important in any study of imperfect competition. Here we study two economies. The first is a multisensor economy in which there are a small number of firms producing an identical product in each sector. This is an interesting model in that it combines strategic substitutability (across firms in a given sector) with a complementarity across sectors.

The second economy is one of monopolistic competition. We use this economy first to elaborate on the nature of welfare losses due to imperfect competition and second to study the effects of money in the presence of menu costs.