The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective
AbstractIn general equilibrium models with oligopolistic firms, equilibrium outcomes may depend on the choice of numeraire. When firms have the power to influence prices strategically, different price normalisations entail objective profit functions which are generally not monotone transformations of each other. Hence, under the assumption of profit maximization an arbitrary change in the price normalisation rule amounts effectively to a change in the objective pursued by firms. Applied general equilibrium analysts using models with imperfect competition have largely ignored the price normalisation problem. In several recent contributions to the literature, applied modellers are explicitly criticized for their neglect to address the numeraire issue. The purpose of this paper is to assess the validity and practical relevance of these criticisms for applied policy analysis.
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Length: 15 pages
Date of creation: 06 May 2005
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Note: Type of Document - pdf; pages: 15. Middlesex University Discussion Paper: Economics No.109 (rev)May 2005
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applied general equilibrium analysis; imperfect competition; price normalization problem; oligopoly; numeraire; CGE analysis;
Find related papers by JEL classification:
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
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