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

Middlesex University Business School Economics Working Paper No. 109

15 Pages Posted: 2 Jun 2004

See all articles by Dirk Willenbockel

Dirk Willenbockel

University of Sussex - Institute of Development Studies

Date Written: May 2005

Abstract

In general equilibrium models with oligopolistic firms, equilibrium outcomes may critically 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.

Keywords: Applied general equilibrium analysis, imperfect competition, firm objectives, numeraire

JEL Classification: D58, D43, L21

Suggested Citation

Willenbockel, Dirk, The Price Normalisation Problem in General Equilibrium Models with Oligopoly Power: An Attempt at Perspective (May 2005). Middlesex University Business School Economics Working Paper No. 109, Available at SSRN: https://ssrn.com/abstract=552764 or http://dx.doi.org/10.2139/ssrn.552764

Dirk Willenbockel (Contact Author)

University of Sussex - Institute of Development Studies ( email )

Brighton
Falmer, Brighton, East Sussex BN1 9RE
United Kingdom

HOME PAGE: http://www.ids.ac.uk

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