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 Nash equilibria. In this paper we show that, given a firm has chosen a particular profit function as its objective, profit maximization can be expressed in such a way that it depends on relative prices only. However, the choice of such an objective function need not be in the interest of the shareholders. This problem is overcome by relating the profits of a firm to the aggregate demand of its shareholders. We propose a definition of the objective of a firm, called maximization of shareholders' real wealth, which does not depend on any price normalizaion. 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. As a consequence, there is no need for absolute prices in the theory of imperfect competition.
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 in its series Discussion Papers with number 96-05.
Length: 32 pages
Date of creation: Apr 1996
Date of revision:
Publication status: Published in: Economic Theory, 1999, 14(2) pp 257-84
Contact details of provider:
Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark
Phone: (+45) 35 32 30 10
Fax: +45 35 32 30 00
Web page: http://www.econ.ku.dk
More information through EDIRC
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, Springer, vol. 14(2), pages 257-284.
- Egbert Dierker & Birgit Grodal, 1998. "The Price Normalization Problem in Imperfect Competition and the objective of the Firm," CIE Discussion Papers, University of Copenhagen. Department of Economics. Centre for Industrial Economics 1998-08, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Egbert DIERKER & Birgit GRODAL, 1996. "The Price Normalization Problem in Imperfect Competition and the Objective of the Firm," Vienna Economics Papers, University of Vienna, Department of Economics vie9616, University of Vienna, Department of Economics.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
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.