Modelling Policy Issues in a World of Imperfect Competition

Egbert Dierker and Birgit Grodal

Scandinavian Journal of Economics, 1998, vol. 100, issue 1, 153-179

Abstract: General equilibrium theory constitutes a sound basis for the discussion of policy issues if firms do not have market power. However, if firms influence prices strategically, the concept of profits loses its meaning due to the price normalization problem. Hence, it is unclear how to model the behavior of oligopolistic firms. In order to provide a conceptual foundation for the analysis of policy issues in the case of imperfect competition, we discuss ways to formulate the objective of a strategic firm. In particular, we investigate the concept of real wealth maximization that is based on profits as well as on shareholders' aggregate demand.

Date: 1998
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