Monopoly Power and the Firm's Valuation: A Dynamic Analysis of Short versus Long-Term Policies
AbstractThis article develops a multi-period production model to examine the optimal dynamic behaviour of a large monopolistic value-maximizing firm that manipulates its valuation as well as the price of its output. In the pre-commitment equilibrium the firm’s output and labour demand are decreased, while the price of consumption is increased, as compared with its competitive counterpart. Profits and the firm's value can, however, be either increased or decreased. In the time-consistent equilibrium the firm’s output and labour demand are increased, while the price of consumption is decreased. More strikingly, the profits in every period are decreased, and may even go negative, while the firm's value can be either lower or higher than in the competitive benchmark. In the continuous-time limit, while the pre-commitment equilibrium retains its basic discrete-time structure, the time-consistent equilibrium tends to the limit of zero profits and hence zero firm's value.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3425.
Date of creation: Jun 2002
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Other versions of this item:
- Suleyman Basak & Anna Pavlova, 2004. "Monopoly power and the firm’s valuation: a dynamic analysis of short versus long-term policies," Economic Theory, Springer, vol. 24(3), pages 503-530, October.
- Basak, Suleyman & Pavlova, Anna, 2003. "Monopoly Power And The Firm'S Valuation: A Dynamic Analysis Of Short Versus Long-Term Policies," Working papers 4234-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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