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The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective

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  • Dirk Willenbockel

    (Middlesex University Business School)

Abstract

In 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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Bibliographic Info

Paper provided by EconWPA in its series GE, Growth, Math methods with number 0505002.

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Length: 15 pages
Date of creation: 06 May 2005
Date of revision:
Handle: RePEc:wpa:wuwpge:0505002

Note: Type of Document - pdf; pages: 15. Middlesex University Discussion Paper: Economics No.109 (rev)May 2005
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Web page: http://128.118.178.162

Related research

Keywords: applied general equilibrium analysis; imperfect competition; price normalization problem; oligopoly; numeraire; CGE analysis;

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References

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  1. 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.
  2. Devarajan, Shantayanan & Rodrik, Dani, 1991. "Pro-competitive effects of trade reform : Results from a CGE model of Cameroon," European Economic Review, Elsevier, vol. 35(5), pages 1157-1184, July.
  3. Hoffmann, Anders N., 2003. "Imperfect competition in computable general equilibrium models -- a primer," Economic Modelling, Elsevier, vol. 20(1), pages 119-139, January.
  4. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-45, February.
  5. J Peter Neary, 2002. "The Road Less Travelled - Oligopoly and Competition Policy in General Equilibrium," Working Papers 200222, School Of Economics, University College Dublin.
  6. Dierker, Egbert & Grodal, Birgit, 1998. " Modelling Policy Issues in a World of Imperfect Competition," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 153-79, March.
  7. Mercenier, Jean, 1995. "Nonuniqueness of Solutions in Applied General Equilibrium Models with Scale Economies and Imperfect Competition," Economic Theory, Springer, vol. 6(1), pages 161-77, June.
  8. CORDELLA, Tito, 1992. "Patterns of trade and oligopoly equilibria: an example," CORE Discussion Papers 1992051, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Ruffin, Roy J., 2003. "Oligopoly and trade: what, how much, and for whom?," Journal of International Economics, Elsevier, vol. 60(2), pages 315-335, August.
  10. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  11. Victor Ginsburgh, 1994. "In the Cournot-Walras general equilibrium model, there may be 'more to gain' by changing the numeraire than by eliminating imperfections: a two-good economy example," ULB Institutional Repository 2013/1885, ULB -- Universite Libre de Bruxelles.
  12. J.Peter Neary, 2003. "Globalisation and Market Structure," DNB Staff Reports (discontinued) 100, Netherlands Central Bank.
  13. Willenbockel, Dirk, 2004. "Specification choice and robustness in CGE trade policy analysis with imperfect competition," Economic Modelling, Elsevier, vol. 21(6), pages 1065-1099, December.
  14. Burniaux, Jean Marc & Waelbroeck, Jean, 1992. "Preliminary results of two experimental models of general equilibrium with imperfect competition," Journal of Policy Modeling, Elsevier, vol. 14(1), pages 65-92, February.
  15. Renström, Thomas I & Yalcin, Erkan, 2002. "Endogenous Firm Objectives," CEPR Discussion Papers 3361, C.E.P.R. Discussion Papers.
  16. Erkan YalÁin & Thomas I. Renstr–m, 2003. "Endogenous Firm Objectives," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(1), pages 67-94, 01.
  17. Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
  18. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
  19. Bo Rasmussen, 1996. "Imperfectly competitive factor markets and price normalization," Journal of Economics, Springer, vol. 63(2), pages 125-138, June.
  20. Kehoe, Timothy J & Prescott, Edward C, 1995. "Introduction to the Symposium: The Discipline of Applied General Equilibrium," Economic Theory, Springer, vol. 6(1), pages 1-11, June.
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Cited by:
  1. Diego Guerrero, 2010. "Some reflections on the dependence of prices on Labour-Values," ENSAYOS DE ECONOMÍA 008788, UNIVERSIDAD NACIONAL DE COLOMBIA SEDE MEDELLIN.

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