Oligopoly and Luce's Choice Axiom

Simon Anderson and André de Palma ()

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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.

Keywords: Choice Axiom; Probabilistic choice models; Oligopoly; Pricing; Representative consumer (search for similar items in EconPapers)
Date: 2012-11
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Published in Regional Science and Urban Economics, 2012, 42 (6), pp.1053-1060. ⟨10.1016/j.regsciurbeco.2011.10.002⟩

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Journal Article: Oligopoly and Luce's Choice Axiom (2012)
Working Paper: Oligopoly and Luce's Choice Axiom (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00820690

DOI: 10.1016/j.regsciurbeco.2011.10.002

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