Imperfect competition in computable general equilibrium models — a primer

Rowing along the computable general equilibrium modelling mainstream

“…An insight into price modelling in CGE models may be inferred from Hoffmann (2002). He says that economists normally view the field of imperfect competition in general equilibrium models as an open Pandora's box of theoretical problems; nevertheless, an increasing number of policy questions require that we incorporate imperfect competition in CGE models.…”

Regulation, market structure and service trade liberalization

“…Since each user might have a different demand elasticity for the service, a question arises which markup rule the service provider will choose to maximize profits. Hoffmann (2002) illustrates that the general equilibrium Lerner markup condition for a service provider j in that case is a weighted average of the perceived demand elasticities for the different users: 3…”

“…To derive an imperfectly competitive firm's Lerner markup condition in such models, one is required to calculate the general equilibrium demand elasticities for all users and weight them appropriately. A recent contribution from Hoffmann (2002) demonstrates the complexities that are involved with calculating such Lerner markup rules under Cournot competition. He shows that a firm uses a weighted average of the different buyers' general equilibrium elasticities of demand to maximize profits, where the weights equal the share sold to each buyer.…”

“…Appendix A: General Equilibrium Lerner Markup Condition Hoffmann (2002) uses three equations to derive the general equilibrium Lerner markup condition when a firm faces different buyers. To simplify notation in this appendix, we will drop the subscript j so that z i represents the amount of services that provider j allocates to sector i.…”

Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications

“…Nonetheless, almost all CGE implementations assume this effect to be small and negligible. Hoffman (1999) proposes an alternative, empirical technique, in which standard CGE models are used to numerically estimate the true elasticity value (by simulating marginal price changes). This approach, however, may be problematic when there are many imperfectly competitive industries, as the simultaneous estimation of several elasticity parameters poses a number of technical difficulties.…”