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Perfect Competition and Optimal Production Decisions under Uncertainty

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  • Eugene F. Fama

Abstract

This paper studies production decisions by firms in a capital market where decision-making by consumer-investors and the structure of equilibrium expected returns on securities are according to a two-parameter (mean-dispersion) model. An attempt is made to distinguish clearly questions concerned with the conditions required for perfect competition among firms as issuers of securities from questions concerned with whether value maximizing production decisions by perfectly competitive firms are Pareto optimal. The two major findings are as follows. First, there are natural externalities in the production decisions of firms that could in principle prevent the capital market from being perfectly competitive. But it is argued that the available empirical evidence is consistent with the conditions required for perfect competition. Second, given a market that satisfies the conditions required for perfect competition, natural external economies in the production decisions of firms can prevent the allocations achieved by perfectly competitive, value maximizing firms from being Pareto optimal. That is, a competitive equilibrium need not be Pareto optimal

Suggested Citation

  • Eugene F. Fama, 1972. "Perfect Competition and Optimal Production Decisions under Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 509-530, Autumn.
    • Handle: RePEc:rje:bellje:v:3:y:1972:i:autumn:p:509-530
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    Cited by:

    1. Thomas Delcey, 2019. "Samuelson vs Fama on the Efficient Market Hypothesis: The Point of View of Expertise [Samuelson vs Fama sur l’efficience informationnelle des marchés financiers : le point de vue de l’expertise]," Post-Print hal-01618347, HAL.
    2. Luis H. B. Braido & V. Filipe Martins†da†Rocha, 2018. "Output Contingent Securities And Efficient Investment By Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 989-1012, May.
    3. Zhao, Guo, 2021. "Determining Capital Structure within Arbitrage-Based Production Framework," MPRA Paper 108492, University Library of Munich, Germany.
    4. Hayne E. Leland, 1974. "Production Theory and the Stock Market," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 125-144, Spring.
    5. Leogrande, Angelo, 2021. "The Destruction of Price-Representativeness," MPRA Paper 111239, University Library of Munich, Germany.
    6. William J. Marshall & Jess B. Yawitz & Edward Greenberg, 1984. "Incentives for Diversification and the Structure of the Conglomerate Firm," NBER Working Papers 1280, National Bureau of Economic Research, Inc.
    7. Tom Arnold & Richard Shockley, 2010. "Real Options Analysis and the Assumptions of Corporate Finance: A Non-Technical Review," Multinational Finance Journal, Multinational Finance Journal, vol. 14(1-2), pages 29-71, March-Jun.

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