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Profit maximization mitigates competition

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Author Info

  • Egbert Dierker

    (Institut für Wirtschaftswissenschaften, Universität Wien, Hohenstaufengasse 9, A-1010 Wien,AUSTRIA)

  • Birgit Grodahl

    (Økonomisk Institut, Københavns Universitet, Studiestræde, DK-1455 København, DENMARK)

Abstract

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.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 7 (1995)
Issue (Month): 1 ()
Pages: 139-160

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Handle: RePEc:spr:joecth:v:7:y:1995:i:1:p:139-160

Note: Received: July 8, 1994; revised version December 23, 1994
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Cited by:
  1. Renström, Thomas I & Yalcin, Erkan, 2002. "Endogenous Firm Objectives," CEPR Discussion Papers 3361, C.E.P.R. Discussion Papers.
  2. Tarun Sabarwal, 2004. "A Consistent Firm Objective When Markets are Incomplete: Profit Maximization," Econometric Society 2004 North American Summer Meetings 141, Econometric Society.
  3. Ramón Torregrosa, 2008. "Macroeconomic effects of an indirect tax substitution," Journal of Economics, Springer, vol. 94(3), pages 199-221, September.
  4. Klaus Ritzberger & Frank Milne, 2002. "Strategic pricing of equity issues," Economic Theory, Springer, vol. 20(2), pages 271-294.
  5. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
  6. Tarun Sabarwal, 2004. "Value Maximization As An Ex Post Consistent Firm Objective When Markets are Incomplete," GE, Growth, Math methods 0406002, EconWPA, revised 19 Jul 2004.
  7. Frank Milne & David Kelsey, 2006. "Imperfect Competition and Corporate Governance," Working Papers 1079, Queen's University, Department of Economics.
  8. Abbas Ali & Abdulrahman Al-Aali & Abdullah Al-Owaihan, 2013. "Islamic Perspectives on Profit Maximization," Journal of Business Ethics, Springer, vol. 117(3), pages 467-475, October.
  9. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer, vol. 46(2), pages 221-254, February.
  10. Thomas Renstrom & Erkan Yalcin, . "Endogeneous Firm Objectives," Wallis Working Papers WP27, University of Rochester - Wallis Institute of Political Economy.
  11. Thomas Renstrom & Erkan Yalcin, 2002. "Endogenous Firm Objectives," Industrial Organization 0204001, EconWPA.
  12. Ritzberger, Klaus, 2005. "Shareholder voting," Economics Letters, Elsevier, vol. 86(1), pages 69-72, January.
  13. Bo Rasmussen, 1996. "Imperfectly competitive factor markets and price normalization," Journal of Economics, Springer, vol. 63(2), pages 125-138, June.

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