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A Test of Profit Maximization

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Author Info
Asplund, Björn Marcus

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Abstract

This paper aims at testing the maintained assumption that firms' objective is to maximize the expected net present value (ENPV) of profits. The idea is to examine pricing behaviour of a monopolist facing a dynamic demand where current sales influence future demand. Empirically, I estimate an Euler equation implied by maximization of ENPV of profits on data from the Swedish Tobacco Monopoly's sales of moist snuff (an addictive tobacco product) during the period 1917-1959. It is found that the monopolist's prices are well below those that would maximize ENPV of profits.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6177.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6177

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Related research
Keywords: firm behaviour; profit maximization;

Find related papers by JEL classification:
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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  1. Dutta, Prajit K & Radner, Roy, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Blackwell Publishing, vol. 66(4), pages 769-98, October. [Downloadable!] (restricted)
  2. Silberston, Aubrey, 1970. "Surveys of Applied Economics: Price Behaviour of Firms," Economic Journal, Royal Economic Society, vol. 80(319), pages 511-82, September. [Downloadable!] (restricted)
  3. Showalter, Mark H., 1999. "Firm behavior in a market with addiction: the case of cigarettes," Journal of Health Economics, Elsevier, vol. 18(4), pages 409-427, August. [Downloadable!] (restricted)
  4. C. Lanier Benkard, 2004. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Review of Economic Studies, Blackwell Publishing, vol. 71, pages 581-611, 07. [Downloadable!] (restricted)
  5. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1994. "An Empirical Analysis of Cigarette Addiction," NBER Working Papers 3322, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09. [Downloadable!] (restricted)
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  7. Frank J. Chaloupka, 1991. "Rational Addictive Behavior and Cigarette Smoking," NBER Working Papers 3268, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Sullivan, Daniel, 1985. "Testing Hypotheses about Firm Behavior in the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 586-98, June. [Downloadable!] (restricted)
  9. Sumner, Daniel A, 1981. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1010-19, October. [Downloadable!] (restricted)
  10. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October. [Downloadable!] (restricted)
  11. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, 2007. "Econometric Tools for Analyzing Market Outcomes," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63 Elsevier. [Downloadable!] (restricted)
  12. Chaloupka, Frank J. & Warner, Kenneth E., 2000. "The economics of smoking," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627 Elsevier. [Downloadable!] (restricted)
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  13. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August. [Downloadable!] (restricted)
    Other versions:
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