The price normalization problem in imperfect competition and the objectiveof the firm

General equilibrium models of oligopolistic competition give rise to relati ve prices only without determining the price level. It is well known that t he choice of a numeraire or, more generally, of a normalization rule conver ting relative prices into absolute prices entails drastic consequences for the resulting set of Nash equilibria when firms are assumed to maximize pro fits. This is due to the fact that changing the price normalization amounts to altering the objective functions of the firms. Clearly, the objective o f a firm must not be based on price normalization rules void of any economi c content. In this paper we propose a definition of the objective of a firm , called maximization of shareholders' real wealth, which takes shareholder s' demand explicitly into account. This objective depends on relative price s only. Real wealth maxima are shown to exist under certain conditions. Mor eover, we consider an oligopolistic market and prove the existence of a Nas h equilibrium in which each firm maximizes the real wealth of its sharehold ers.