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Profit Maximization Mitigates Competition

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  • Egbert DIERKER
  • Birgit GRODAL

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

Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number vie9405.

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Date of creation: Oct 1994
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Publication status: published in Economic Theory, 7 (1996), 139-160.
Handle: RePEc:vie:viennp:vie9405

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Web page: http://www.univie.ac.at/vwl

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Cited by:
  1. Klaus Ritzberger & Frank Milne, 2002. "Strategic pricing of equity issues," Economic Theory, Springer, vol. 20(2), pages 271-294.
  2. Renström, Thomas I & Yalcin, Erkan, 2002. "Endogenous Firm Objectives," CEPR Discussion Papers 3361, C.E.P.R. Discussion Papers.
  3. Sabarwal Tarun, 2007. "Value Maximization as an Ex-Post Consistent Firm Objective When Markets are Incomplete," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-21, January.
  4. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
  5. 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.
  6. Ritzberger, Klaus, 2005. "Shareholder voting," Economics Letters, Elsevier, vol. 86(1), pages 69-72, January.
  7. David Kelsey & Frank Milne, 2008. "Imperfect Competition and Corporate Governance," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 1115-1141, December.
  8. Ramón Torregrosa, 2008. "Macroeconomic effects of an indirect tax substitution," Journal of Economics, Springer, vol. 94(3), pages 199-221, September.
  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. Tarun Sabarwal, 2004. "A Consistent Firm Objective When Markets are Incomplete: Profit Maximization," Econometric Society 2004 North American Summer Meetings 141, Econometric Society.
  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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