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Oligopoly and Luce's Choice Axiom

Author

Listed:
  • Simon P. Anderson

    (Department of Economics, University of Virginia - Uniiversity of Virginia)

  • André de Palma

    (ENS Cachan - École normale supérieure - Cachan, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

We apply Luce's choice axiomatic framework to oligopoly pricing of quality differentiated goods. The demand system is a probabilistic comparison of surpluses across products. Zero demands arise naturally, in contrast to the related CES and Mixed Logit models. With asymmetric products, high mark-ups and high demands are driven by high quality-costs. The oligopoly price equilibrium delivers a simple surplus-split property. We reconcile the model with standard consumer theory by introducing income, and hence generate a representative consumer formulation, which has a quadratic form in a central case. We further introduce a preference representation based on the Gabszewicz-Thisse vertical quality formulation.

Suggested Citation

  • Simon P. Anderson & André de Palma, 2012. "Oligopoly and Luce's Choice Axiom," Post-Print hal-00820690, HAL.
    • Handle: RePEc:hal:journl:hal-00820690
    DOI: 10.1016/j.regsciurbeco.2011.10.002
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    Cited by:

    1. is not listed on IDEAS
    2. Simon P. Anderson, Nisvan Erkal and, 2009. "Aggregative Oligopoly Games with Entry," Department of Economics - Working Papers Series 1175, The University of Melbourne, revised 2013.

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    Keywords

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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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