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Aggregation and Imperfect Competition: On the Existence of Equilibrium

Andrew Caplin
Barry Nalebuff

Abstract

We present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products. The central result provides general conditions under which there exists a pure-strategy price equilibrium for any number of firms producing any set of products. This includes products with multi-dimensional attributes. In addition to the proof of existence, we provide conditions for uniqueness. Our analysis covers location models, the characteristics approach, and probabilistic choice together in a unified framework. To prove existence, we employ aggregation theorems due to Prekopa (1971) and Borell (1975). Our companion paper (Caplin and Nalebuff (1991)) introduces these theorems and develops the application to super-majority voting rules.