Profit maximization mitigates competition?

Summary. We consider oligopolistic markets in which the notion of shareholders’utility is well-defined and compare the Bertrand-Nash equilibria in case of utility maximization with those under the usual profit maximization hypothesis. Our main result states that profit maximization leads to less price competition than utility maximization. Since profit maximization tends to raise prices, it may be regarded as beneficial for the owners as a whole. Moreover, if profit maximization is a good proxy for utility maximization, then there is no need for a general equilibrium analysis that takes the distribution of profits among consumers fully into account and partial equilibrium analysis suffices.     

Are incomplete markets able to achieve minimal efficiency?

Summary. We consider economies with incomplete markets, one good per state, two periods, t = 0,1, private ownership of initial endowments, a single firm, and no assets other than shares in this firm. In Dierker, Dierker, Grodal (2002), we give an example of such an economy in which all market equilibria are constrained inefficient. In this paper, we weaken the concept of constrained efficiency by taking away the planners right to determine consumers investments. An allocation is called minimally constrained efficient if a planner, who can only determine the production plan and the distribution of consumption at t = 0, cannot find a Pareto improvement. We present an example with arbitrarily small income effects in which no market equilibrium is minimally constrained efficient.Received: 26 November 2002, Revised: 28 May 2003, JEL Classification Numbers: D2, D52, D61, G1.We are grateful to an anonymous referee for very valuable comments. E. and H. Dierker would like to thank the Institute of Economics, University of Copenhagen, for its hospitality and its financial support.     

Some Implications of Imperfect Competition For Recent Trade Theory*

This paper argues that in a general-equilibrium context, it is not sensible for oligopolistic (and mono-polistically competitive) firms to maximize profit, because the outcome would be sensitive to the choice of the numeraire. the natural objective of these firms would be to maximize the utility of the shareholders if the shareholders are identical. I show that even if each firm takes the representative individual's marginal utility of income as given, the outcome of the utility maximization objective is Pareto optimal, and in equilibrium, each firm equates price with marginal cost.     

A Classroom Experiment Demonstrating the Generation of a Market Demand Function and the Determination of Equilibrium Price

Economics instructors continue to look for simple and effective means of motivating students while conveying important basic principles. Dennis Weidenaar describes a supply and demand simulation which can be used in any classroom to show how a market demand function is generated and how equilibrium price is determined. Involving little in the way of preparation, this activity simply calls for the sale of apples to students by the instructor, with individual and aggregate demand schedules being calculated. Such concepts as price and income elasticity, profit maximization, opportunity cost, market organization (monopoly, perfect competition and monopsony), consumer's and producer's surplus, and total, marginal and average revenue and cost can be illustrated through the use of the simulation and the suggested discussion questions.     

Mean-Gini analysis of stochastic externalities: The case of groundwater contamination

The mean-Gini approach is used to analyze stochastic externalities generated by agricultural production. The model addresses the problem of groundwater pollution caused by excessive fertilizer application. Inherent in the mean-Gini approach to expected utility maximization is a two-fold value: the simplicity of the two-parameter mean-variance model and satisfaction of necessary and sufficient conditions for stochastic dominance. Price and quantity policy recommendations to control externalities are formulated based upon the relative assessment of uncertainty by the regulatory authority and the farmers. Using the Gini as a measure of risk allows for the quantification of control policy measures under differentiated risk aversion and multiple sources of pollution. The model shows that when producers underestimate uncertainty, quota policies restricting fertilizer are more efficient than tax policies in reducing groundwater contamination.Work on this paper was carried out when visiting the University of Maryland. Financial aid for the work was provided by the USDA ERS-NRED under a cooperative agreement between the Department of Agricultural and Resource Economics, University of Maryland, and the USDA — Economic Research Service — Natural Resource Economics Division, I am grateful to John Miranowski and Darrell Hueth for that support. I am indebted as well to Lana Shalit, who helped me revise the paper.     

Behavioral rules,inventory adjustments and the stability of macroequilibria

This paper extends the static analysis of Nikaido (1974) and the temporary equilibrium analysis of Day-Fan (1980) to a full disequilibrium analysis by introducing inventories explicitly into the Keynes-Kaldor-Nakaido framework. Two different inventory adjustment processes are considered. The first is based on the micro behavioral assumption that each producer coordinates his safes, production and inventory departments so that inventories can be adjusted to the desired level through intra-firm shipments. The second follows the traditional approach of treating inventories as part of investment demand. Coupled with the two behavioral rules of price-output determination, namely full-cost pricing and perceived profit maximization four models are generated. These models are studied for their dynamic behaviors in disequilibrium. It is found that the adjustment trajectories of both the full-cost pricing and perceived profit maximization models with intra-firm inventory adjustments exhibit damped cycles, whereas those of both models with inventories treated as investment demand are inherently unstable.     

Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly in General Equilibrium

Employing a general equilibrium framework, Blackorby and Murty prove that, with a monopoly and under 100% profit taxation and uniform lump‐sum transfers, the utility possibility sets of economies with unit and ad valorem taxes are identical. This welfare equivalence is in contrast to most previous studies, which demonstrate the superiority of the ad valorem tax in a partial equilibrium framework. In this paper, we relax the assumption of 100% profit taxation and allow the consumers to receive profit incomes from ownership of shares in the monopoly firm. We find that, under certain regularity conditions, for any fixed vector of profit shares, the utility possibility sets of economies with unit and ad valorem taxes are not generally identical. But it does not imply that one completely dominates the other. Rather, the two utility possibility frontiers cross each other. Additionally, employing a standard partial equilibrium welfare analysis, we show that the Marshallian social surpluses resulting from the two tax structures are identical when the government can implement unrestricted transfers.     

Trembles in extensive games with ambiguity averse players

We introduce and analyze three definitions of equilibrium for finite extensive games with imperfect information and ambiguity averse players. In a setting where players’ preferences are represented by maxmin expected utility, as characterized in Gilboa and Schmeidler (J Math Econ 18(2):141–153, 1989), our definitions capture the intuition that players may consider the possibility of slight arbitrary mistakes. This generalizes the idea leading to trembling-hand perfect equilibrium as introduced in Selten (Int J Game Theory 4(1):25–55, 1975), by allowing for ambiguous trembles characterized by sets of distributions. We prove existence for two of our equilibrium notions and relate our definitions to standard equilibrium concepts with expected utility maximizing players. Our analysis shows that ambiguity aversion can lead to behavioral implications that are distinct from those attained under expected utility maximization, even if ambiguous beliefs only arise from the possibility of slight mistakes in the implementation of unambiguous strategies.     

THE POTENTIAL FOR SHORT‐RUN SHIFTING OF A CORPORATE PROFITS TAX

Can the owners of a firm shift a corporate profits tax to consumers? Not in the short run if the tax is stated as a proportion of profits and the firm is a profit maximizer. But what if the firm wishes to pursue a strategy other than profit maximization, say revenue maximization subject to a profit constraint? Under such a condition the firm's reaction to a tax or tax increase might be a price rise that captures part of the foregone profits. We show that firms which operate at a point on their demand curve that differs from profit maximization have an incentive to raise price in response to the tax – and that high cost firms have a greater incentive to raise price than do low cost firms. Our empirical analysis of the US beer industry confirms this finding, and sheds light on the Krzyzaniak–Musgrave analysis of the 1960s which suggested that the corporation income tax produced significant short‐run shifting.     

A model of sliding-scale regulation

Price caps, while widely touted, are less commonly implemented. Most incentive schemes involve profit sharing and are, thus, variants of sliding-scale regulation. I show that, relative to price caps, some degree of profit sharing always increases expected welfare. Numerical simulations show that welfare may be enhanced by large amounts of profit sharing and by granting the firm a greater share of gains than of losses. Simulations also suggest profit sharing is most beneficial when the firm's initial cost is high and cost-reducing innovations are difficult to achieve but offer the potential for substantial savings.This paper has benefitted from the comments of Mark Bagnoli, Jim Burgess, Michael Crew, Steve Hackett, Paul Kleindorfer, Michael Riordan, Ted Stefos, Ingo Vogelsang, Dennis Weisman, two anonymous referees, and workshop participants at the First Annual Northeastern Health Economics Conference, the Fourth Annual Health Economics Conference, GTE, Indiana University, the Rutgers Advanced Workshop in Regulation and Public Utility Economics, and the 20th Telecommunications Policy Research Conference. Financial support from the Management Science Group of the Department of Veterans Affairs and from Indiana University is gratefully acknowledged.     

Private Benefits,Warm Glow,and Reputation in the Free and Open Source Software Production Model

A great deal of production and consumption behavior takes place in the context of social organizations that seem to fall outside of the traditional paradigm of profit/utility maximization. These organizations are voluntary in nature and rely on contributions from members to achieve their objectives. Examples include the Linux operating system and other FOSS projects, political movements, churches and religious groups, Habitat for Humanity, and similar charitable organizations. In this paper, we consider a world containing agents with heterogeneous abilities who may voluntarily choose to make effort contributions to one or more different public projects. Agents are motivated by a desire to be seen as significant contributors to important and valuable projects, the warm glow from the act of contributing, and a desire to directly enjoy the benefits of projects when complete. We find that contributions from others can be either strategic complements or substitutes. We show that Nash equilibria exist and study how agents’ abilities and project quality affect the equilibrium levels of contributions.     

On modeling the agricultural sector in developing economies: An integrated approach of micro and macroeconomics

The paper introduces a theoretically consistent and empirically implementable method for the construction of general equilibrium models of the agricultural sector in a developing economy. The point of departure is the agricultural household, for which the microeconomic behavioral relations are formulated based on the assumption of utility and profit maximization. These relations are estimated from microeconomic data. In the second step the estimated microeconomic behavioral relations are aggregated across households into the macroeconomic behavioral relations, i.e., the supply and demand functions for the agricultural sector. Third, the linkage equations between the agricultural sector and the rest of the economy are specified on the basis of alternative assumptions on environmental and institutional characteristics and they are estimated from macroeconomic data. Finally, the macroeconomic behavioral relations and linkage equations are combined to provide a general equilibrium solution of the agricultural sector. The solution of the alternative equilibrium models can be used for comparative statics analysis of government policies and of changes in other exogenous variables. The illustrative application of the model is based on Indian data.     

An evolutionary stable strategy for retailers selling complementary goods subject to indirect network externalities

A two-population evolutionary game model is constructed for retailers and used to investigate the effect of indirect network externalities (INEs) and product complementarity on the strategic choice of marketing objective of the retailers. The results show that their strategic choice of marketing objective is correlated with market reservation price (MRP) when the strength of the INE is low. When the MRP is low, the retailers tend to adopt a strategy of profit maximization. As MRP increases, low-cost retailers adopt a strategy of revenue maximization instead of profit maximization to maximize revenue at an earlier stage than high-cost retailers. However, when the strength of the INE is high, retailers only choose a strategy of revenue maximization as their marketing objective. The probability that a retailer uses a revenue maximization strategy increases as the strength of the INE grows, and product complementarity increases, when there is an equilibrium between two pure marketing objective strategies. An optimal preference ratio for retailers may exist when the strength of INE is found to be not large enough. Numerical examples reveal that the degree of preference of retailers to maximize profit is shown to be negatively correlated with both INE and product complementarity. On the other hand, their profits are positively correlated with both of these factors.     

Cooperation in the commons

This paper delineates circumstances in which a first-best cooperative solution can be supported as a subgame perfect equilibrium in a dynamic common property renewable resource game. In a game with nonlinear resource stock effects on cost, we characterize a worst perfect equilibrium that supports cooperation for the widest range of parameter values for the discount rate, resource growth rate, harvest price, and the number of resource exploiters. The strategy profile that we propose is consistent with human behavior observed in experiments and common property resource case studies.We thank seminar participants at the University of Minnesota, the Heartland Environmental and Resource Economics Conference at Iowa State University, Keio University, and two anonymous referees for helpful comments.     

Estimating labor supply and production decisions of self-employed farm producers

This paper proposes a model oriented towards integrating farm households' production and consumption decisions into a unified theoretical and econometric framework. It is argued that, in contrast with other forms of economic organization, farm households' utility and profit maximization decisions are not likely to be independent.Econometric estimation of a farm-household model using Canadian data suggests that utility and profit maximizing decisions are not indeed independent and, moreover, that there are significant gains in explanatory power and efficiency by estimating the consumption and production equations jointly.     

A remark on a utility representation theorem of Rader

Summary In this note we consider some problems involved in proving the existence of a continuous real-valued utility function representing a preference relation. We claim that there is an error in the classical Rader proof of the existence of an upper semicontinuous utility function. We also pose some open questions regarding some problems in utility theory.The work for this paper was begun while I was visiting the Department of Applied Economics at the University of Cambridge in 1992. I thank the Department for its hospitality. I should also like to thank A. F. Beardon for some extremely valuable discussions about the general nature of utility functions.     

Limited arbitrage is necessary and sufficient for the existence of a competitive equilibrium with or without short sales

Summary A condition oflimited arbitrage is defined on the endowments and the preferences of the traders in an Arrow-Debreu economy. Theorem 1 establishes thatlimited arbitrage is necessary and sufficient for the existence of a competitive equilibrium in markets with or without short sales. Limited arbitrage bounds utility arbitrages, the diversity of the traders in the economy, and the gains from trade which they can afford from initial endowments (Proposition 2); it is related to but nonetheless different from the no-arbitrage condition used in finance. Theorem 2 establishes that an Arrow — Debreu economy has a competitive equilibrium if and only if every one of its subeconomies withN + 1 traders does, whereN is the number of commodities. Limited arbitrage has been shown elsewhere to be equivalent to the existence of the core [16], to the contractibility of spaces of preferences and to the existence of continuous anonymous social choice rules which respect unanimity [10], [14], [15], [16].This paper was circulated in December 1991 as a Working Paper of the Department of Economics, Columbia University, New York, and presented at seminars at Mathematics, Economics, and Operations Research Departments at Columbia, Harvard, Stanford University of California at Berkeley, University of Bonn and the University of Siena, at an invited presentation at the European Congress of Mathematicians, July 1992, and the Winter Meetings of the Econometric Society in Boston, January 1994. Valuable comments and suggestions from Roko Aliprantis, Masahiko Aoki, Kenneth Arrow, Duncan Foley, Geoffrey Heal, Lionel McKenzie, Paul Milgrom and two anonymous referees, and research support from NSF Grant No. 92-16028 and the Stanford Institute for Theoretical Economics are gratefully acknowledged.     

Portfolio Fishing

The optimal fishing pattern in a multi-cohort fishery is determined using risk theory.Portfolio theory becomes applicable by treating different age groups of fish as different assets. A possibility set is derived using data on Icelandic cod fisheries. In the presence of risk aversion, it is shown that the abrupt behavior found in deterministic models is changed towards a smoother fishing pattern. The historical selection pattern for the Icelandic cod stock is shown to be near optimal using a maximal effort-type cost function, but historical levels of effort are inefficient and lead to less profit and greater fluctuations than implied by profit or utility maximization.     

Evolutionary choice of markets

We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the markets may differ in the liquidity they provide. Traders have idiosyncratic preferences for the markets, e.g.due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that no trade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. By contrast, whenever the number of traders becomes large, the evolutionary process selects a unique stochastically stable state which corresponds to the equilibrium with two active markets and coincides with the welfare maximizing market structure. We are grateful to Thorsten Hens, Fernando Vega-Redondo and a referee for valuable comments. We also thank seminar participants at the University of Zurich, the CES research seminar at the University of Munich, the Koc University in Istanbul as well as conference participants at the SAET conference in Ischia, the ESEM in Lausanne and the ESF workshop on Behavioural Models in Economics and Finance in Vienna. A first version of the paper was written while Marc Oliver Bettzüge was visiting the Institute for Empirical Research in Economics at the University of Zurich. Financial Support by the Swiss Banking Institute and by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged. The NCCR FINRISK is a research program supported by the Swiss National Science Foundation.     

Expected utility theory and the experiments

The experimental evidence against expected utility theo or unconvincing. When one modifies the experiments to mi tends to support traditional theory.Dewey H. Johnson Professor of Economics, Department of Economics, College of Business Administration, University of South Carolina. I am grateful for comments from seminar participants at the University of Melbourne, University of South Carolina, University of Stockholm, and the University of Western Ontario. John Hey provided a firm, but sympathetic, editorial hand.