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Price uncertainty, the competitive firm and the dual theory of choice under risk

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  • Demers, Fanny
  • Demers, Michel

Abstract

This paper undertakes an analysis of the competitive firm facing output price uncertainty based on Yaari's dual theory of choice under risk. The axiomatic foundation of Yaari's non-expected utility approach permits the formulation of a preference functional which is linear in profit but non-linear in distribution. Yaari's approach allows seperation of the firm's attitude towards risk from its attitude towards wealth and is consistent with experimental evidence on decision-making under uncertainty. In Yaar's dual theory the linearity in profit of the preference funcional stems from a constant marginal utility of wealth and is compatible with either risk aversion or risk inclination. This appealing feature of the dual theory allows us (1) to obtain a characterization of output and input decisions of firms which , unlike the von Neumann-Morgenstern theory of the firm, is in comformity with the main results of the theory of the firm under certainty; (2) to find intuitive comparative statistics effects of increases in risk and risk aversion; (3) to define the profit function for a firm with dual theoretic preferences and show how Hotelling's lemma can be applied to find the firm's output supply and input demand functions.
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Suggested Citation

  • Demers, Fanny & Demers, Michel, 1990. "Price uncertainty, the competitive firm and the dual theory of choice under risk," European Economic Review, Elsevier, vol. 34(6), pages 1181-1199, September.
  • Handle: RePEc:eee:eecrev:v:34:y:1990:i:6:p:1181-1199
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    Cited by:

    1. Volij, Oscar & Winter, Eyal, 2002. "On risk aversion and bargaining outcomes," Games and Economic Behavior, Elsevier, vol. 41(1), pages 120-140, October.
    2. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ?
      [The new models of decision under risk or uncertainty : What approach?]
      ," MPRA Paper 25442, University Library of Munich, Germany.
    3. Trabelsi, Mohamed Ali, 2008. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ?
      [The new models of decision under risk or uncertainty: What approach?]
      ," MPRA Paper 83347, University Library of Munich, Germany, revised 2008.
    4. Schmidt, Ulrich & Zank, Horst, 2009. "A simple model of cumulative prospect theory," Journal of Mathematical Economics, Elsevier, vol. 45(3-4), pages 308-319, March.
    5. Bernhard Arnold & Ingrid Größl & Peter Stahlecker, 2000. "Competitive supply behavior when price information is fuzzy," Journal of Economics, Springer, vol. 72(1), pages 45-66, February.
    6. Hadar, Josef & Seo, Tae Kun, 1995. "Asset diversification in Yaari's dual theory," European Economic Review, Elsevier, vol. 39(6), pages 1171-1180, June.
    7. Jean-Louis ARCAND, 2006. "Pessimism, Optimism and Credit Rationing," Working Papers 200620, CERDI.
    8. Trabelsi, Mohamed Ali, 2006. "Les Nouveaux Modèles de Décision dans le Risque et l’Incertain : Quel Apport ?
      [The New Models of Decision Under Risk or Uncertainty : What Approach?]
      ," MPRA Paper 76954, University Library of Munich, Germany.
    9. Kolstad, Charles D. & Kelly, David L. & Mitchell, Glenn, 1999. "Adjustment Costs from Environmental Change Induced by Incomplete Information and Learning," University of California at Santa Barbara, Economics Working Paper Series qt9mx119gc, Department of Economics, UC Santa Barbara.

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