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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," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00820690, HAL.
    • Handle: RePEc:hal:cesptp:hal-00820690
    DOI: 10.1016/j.regsciurbeco.2011.10.002
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    References listed on IDEAS

    as
    1. repec:bla:jindec:v:49:y:2001:i:2:p:113-35 is not listed on IDEAS
    2. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
    3. André Palma & Karim Kilani, 2011. "Transition choice probabilities and welfare analysis in additive random utility models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(3), pages 427-454, April.
    4. Anderson, Simon Peter & de Palma, Andre & Thisse, Jacques-Francois, 1988. "A Representative Consumer Theory of the Logit Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 461-466, August.
    5. Simon P. Anderson & André de Palma, 2001. "Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods too Low?," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 113-135, June.
    6. Reynald-Alexandre Laurent, 2007. "Le modèle « Élimination par attributs » de Tversky. Une application à la différenciation des produits," Revue économique, Presses de Sciences-Po, vol. 58(3), pages 545-554.
    7. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
    8. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
    9. Anderson, Simon P. & de Palma, Andre & Thisse, Jacques-Francois, 1988. "The CES and the logit : Two related models of heterogeneity," Regional Science and Urban Economics, Elsevier, vol. 18(1), pages 155-164, February.
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    Cited by:

    1. 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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    More about this item

    Keywords

    Choice Axiom; Probabilistic choice models; Oligopoly; Pricing; Representative consumer;
    All these keywords.

    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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