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Asymmetric Information about Perfect Competition:
The Treatment of Perfect Information in Introductory Economics Textbooks

Scott A. Beaulier
Assistant Professor of Economics
Stetson School of Business and Economics
Mercer University
Macon, GA 31207
Phone: (478) 301-5596
beaulier_sa@mercer.edu
URL: www.scottbeaulier.com

Wm. Stewart Mounts, Jr.
Professor of Economics
Stetson School of Business and Economics
Mercer University
Macon, GA 31207
Phone: (478) 301-2837
mounts_ws@mercer.edu

September 2008

Acknowledgements: The authors thank David Prychitko for useful comments and suggestions. The standard disclaimer applies. Asymmetric Information about Perfect Competition:
The Treatment of Perfect Information in Introductory Economics Textbooks

Abstract

The theory of perfect competition is the most fundamental core topic of economics. Deviations from its underlying assumptions offer the format for the development of all other aspects of economic theory. For example, reducing the number of sellers and blocking entry initiates the discussion of monopoly, deadweight losses, rent-seeking behavior, etc. This first presupposes that the underlying assumptions are present in some manner. This, however, is not the case for the assumption of perfect information. In many instances this is not even mentioned. Yet, the relaxation of this assumption has led to many recent innovations in both micro and macroeconomics. This paper looks at how market-leading introductory economics textbooks treat perfect information within the theory of perfect competition. From this examination it is clear that many textbooks gloss over, or completely avoid, perfect information. This matters greatly as students need to see that the current state of affairs in all of economics is based on the full understanding of perfect competition and deviations from its assumptions. In a more general sense, this omission suggests that principles texts need to rethink their approach to presenting microeconomics.

Asymmetric Information about Perfect Competition:
The Treatment of Perfect Information in Introductory Economics Textbooks

I. Introduction

The theory of perfect competition sets the frame of reference for all presentations of economic theory, both microeconomic and macroeconomic. As such, it serves as the efficiency benchmark when evaluating economic outcomes, both on the chalkboard and in the measurement of reality. In addition, it remains the starting point for discussions of the theory of the firm.[1] Among the faithful, the market structure of perfect competition requires five necessary assumptions: 1) Firms sell a homogeneous product;

2) There are a large number of small firms;
3) Firms are price takers;
4) There are no barriers to entry and exit in the long-run; and

(5) Firms and consumers have perfect information.

While we suggest there is general agreement in the profession that all five are necessary for the theory of perfect competition to hold, some textbooks only rely on two or three of them when telling the introductory story of perfect competition. Yet, an assumption that textbook authors often drop or, at the very least, treat fast and loose is that of perfect information. Take Mankiw’s (2004) treatment for example. He simply chooses not to mention it. This failure is problematic. For example, information economics, which most textbooks do cover within market failure, assumes imperfect information. How can students understand the importance imperfect information when the topic of perfect information has been largely omitted or treated lightly? In many cases, students are introduced to information-related problems in economics without having any clear benchmark against which to judge the problem. If the instructor wishes to speak clearly about information asymmetries,[2] lemons, and missing markets, imperfect...
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