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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

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 3 (1972)
Issue (Month): 2 (Autumn)
Pages: 509-530

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Handle: RePEc:rje:bellje:v:3:y:1972:i:autumn:p:509-530

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Cited by:
  1. 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.

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