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On the Microfoundation of Linear Oligopoly Demand

Author

Listed:
  • Bos Iwan

    (Department of Organisation, Strategy and Entrepreneurship, Maastricht University. P.O. Box 616, 6200 MD, Maastricht, The Netherlands)

  • Vermeulen Dries

    (Department of Quantitative Economics, Maastricht University, Maastricht, The Netherlands)

Abstract

We critically assess the representative consumer with quadratic aggregate utility function which forms the foundation of a well-known class of linear oligopoly demand structures. It is argued that this approach is problematic and redundant. Regarding the latter, we show how the same demand system can be derived directly from a population of heterogeneous buyers for any number of products. Welfare analyses based on aggregate demand is shown to be sensitive to the underlying microfoundation.

Suggested Citation

  • Bos Iwan & Vermeulen Dries, 2022. "On the Microfoundation of Linear Oligopoly Demand," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 22(1), pages 1-15, January.
    • Handle: RePEc:bpj:bejtec:v:22:y:2022:i:1:p:1-15:n:6
    DOI: 10.1515/bejte-2019-0114
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    References listed on IDEAS

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    1. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
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    3. James E. Hartley, 1996. "Retrospectives: The Origins of the Representative Agent," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 169-177, Spring.
    4. Michael Jerison, 1997. "Nonrepresentative Representative Consumers," Discussion Papers 97-01, University at Albany, SUNY, Department of Economics.
    5. Michael Kopel & Anna Ressi & Luca Lambertini, 2017. "Capturing Direct and Cross Price Effects in a Differentiated Products Duopoly Model," Manchester School, University of Manchester, vol. 85(3), pages 282-294, June.
    6. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    7. Amir, Rabah & Erickson, Philip & Jin, Jim, 2017. "On the microeconomic foundations of linear demand for differentiated products," Journal of Economic Theory, Elsevier, vol. 169(C), pages 641-665.
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    Cited by:

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    3. Soeiro, Renato & Adrego Pinto, Alberto, 2019. "Social power as a solution to the Bertrand Paradox," MPRA Paper 94271, University Library of Munich, Germany.

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    More about this item

    Keywords

    microfoundations; oligopoly theory; product differentiation; representative consumer models;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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