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

  • Dirk Willenbockel

    (Middlesex University Business School)

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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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
Contact details of provider: Web page: http://econwpa.repec.org

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  13. 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.
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  16. Bo Rasmussen, 1996. "Imperfectly competitive factor markets and price normalization," Journal of Economics, Springer, vol. 63(2), pages 125-138, June.
  17. 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.
  18. 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.
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