The Price Normalization Problem in Imperfect Competition and the objective of the Firm
AbstractGeneral equilibrium models of oligopolistic competition give rise to relative prices only without determining the price level. It is well known that the choice of a numéraire or, more generally, of a normalization rule converting relative prices into absolute prices entails drastic consequences for the resulting set of Nash equilibria when firms are assumed to maximize profits. This is due to the fact that changing the price normalization amounts to altering the objective functions of the firms. Clearly, the objective of a firm must not be based on price normalization rules void of any economic content. In this paper we propose a definition of the objective of a firm, called maximization of shareholders´ real wealth, which takes shareholders´ demand explicitly into account. This objective depends on relative prices only. Real wealth maxima are shown to exist under certain conditions. Moreover, we consider an oligopolistic market and prove the existence of a Nash equilibrium in which each firm maximizes the real wealth of its shareholders.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 1998-08.
Length: 31 pages
Date of creation: Oct 1998
Date of revision:
Publication status: Published in: Economic Theory. August 1999; 14(2): 257-84
Contact details of provider:
Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark
Phone: (0045) 35 32 30 54
Fax: +45 35 32 30 00
Web page: http://www.econ.ku.dk/cie/
More information through EDIRC
price normalization problem; imperfect competition; oligopoly; firms´ objectives; real wealth maximization; profits and shareholders´ demand;
Other versions of this item:
- Birgit Grodal & Egbert Dierker, 1999. "The price normalization problem in imperfect competition and the objective of the firm," Economic Theory, Springer, vol. 14(2), pages 257-284.
- Egbert DIERKER & Birgit GRODAL, 1996. "The Price Normalization Problem in Imperfect Competition and the Objective of the Firm," Vienna Economics Papers vie9616, University of Vienna, Department of Economics.
- Egbert Dierker & Birgit Grodal, 1996. "The Price Normalization Problem in Imperfect Competition and the Objective of the Firm," Discussion Papers 96-05, University of Copenhagen. Department of Economics.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Klaus Ritzberger, 2007. "Price normalization under imperfect competition," Economic Theory, Springer, vol. 33(2), pages 365-368, November.
- Suleyman Basak & Anna Pavlova, 2004.
"Monopoly power and the firm’s valuation: a dynamic analysis of short versus long-term policies,"
Springer, vol. 24(3), pages 503-530, October.
- Basak, Suleyman & Pavlova, Anna, 2002. "Monopoly Power and the Firm's Valuation: A Dynamic Analysis of Short versus Long-Term Policies," CEPR Discussion Papers 3425, C.E.P.R. Discussion Papers.
- Basak, Suleyman & Pavlova, Anna, 2003. "Monopoly Power And The Firm'S Valuation: A Dynamic Analysis Of Short Versus Long-Term Policies," Working papers 4234-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Basak, Suleyman & Pavlova, Anna, 2004. "Monopoly Power and the FirmÂ€Ù³ Valuation:," Working papers 4234-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Bonnisseau, J.-M. & Florig, M., 2000.
"Non-Existence of Duopoly Equilibria : A Simple Numerical Example,"
Papiers d'Economie MathÃÂ©matique et Applications
2000.90, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Jean-Marc Bonnisseau & Michael Florig, 2005. "Non-existence of Duopoly Equilibria: A Simple Numerical Example," Journal of Economics, Springer, vol. 85(1), pages 65-71, 07.
- Neary, J Peter, 2001.
"Competition, Trade and Wages,"
CEPR Discussion Papers
2732, C.E.P.R. Discussion Papers.
- Camelia Bejan, 2008. "The objective of a privately owned firm under imperfect competition," Economic Theory, Springer, vol. 37(1), pages 99-118, October.
- Shirai, Koji, 2010. "An existence theorem for Cournot-Walras equilibria in a monopolistically competitive economy," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 1093-1102, November.
- Mich Tvede & Hervé Crès, 2011. "Production externalities: internalization by voting," Sciences Po publications info:hdl:2441/eu4vqp9ompq, Sciences Po.
- Bejan, Camelia, 2008. "Production and financial decisions under uncertainty," MPRA Paper 11033, University Library of Munich, Germany.
- Camelia Bejan & Florin Bidian, 2012.
"Ownership structure and efficiency in large economies,"
Springer, vol. 50(3), pages 571-602, August.
- Bejan, Camelia & Bidian, Florin, 2009. "Ownership Structure and Efficiency in Large Economies," MPRA Paper 17677, University Library of Munich, Germany.
- J. Peter Neary, 2000. "Monopolistic Competition and International Trade Theory," Working Papers 200025, School Of Economics, University College Dublin.
- Gerhard Sorger, 1996.
"Imperfect competition and capital accumulation: the role of price normalization,"
Journal of Economics,
Springer, vol. 63(3), pages 279-302, October.
- Gerhard SORGER, 1995. "Imperfect Competition and Capital Accumulation: The Role of Price Normalization," Vienna Economics Papers vie9506, University of Vienna, Department of Economics.
- Ramón Torregrosa, 2008. "Macroeconomic effects of an indirect tax substitution," Journal of Economics, Springer, vol. 94(3), pages 199-221, September.
- Bjørn Sandvik, 2003. "Optimal Taxation and Normalisations," CESifo Working Paper Series 1025, CESifo Group Munich.
- Ritzberger, Klaus, 2005. "Shareholder voting," Economics Letters, Elsevier, vol. 86(1), pages 69-72, January.
- Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer, vol. 46(2), pages 221-254, February.
- Cherchye, Laurens & Kuosmanen, Timo & Post, Thierry, 2002. "Non-parametric production analysis in non-competitive environments," International Journal of Production Economics, Elsevier, vol. 80(3), pages 279-294, December.
- Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
- Dirk Willenbockel, 2005. "The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective," GE, Growth, Math methods 0505002, EconWPA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann).
If references are entirely missing, you can add them using this form.