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Profit Maximization Mitigates Competition

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  • Dierker, Egbert
  • Grodal, Birgit

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 proces, 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.

Suggested Citation

  • Dierker, Egbert & Grodal, Birgit, 1996. "Profit Maximization Mitigates Competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(1), pages 139-160, January.
  • Handle: RePEc:spr:joecth:v:7:y:1996:i:1:p:139-60
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    References listed on IDEAS

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    Cited by:

    1. Cozzi, Guido, 1999. "R&D Cooperation and Growth," Journal of Economic Theory, Elsevier, vol. 86(1), pages 17-49, May.
    2. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 221-254.
    3. 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.
    4. Tarun Sabarwal, 2004. "A Consistent Firm Objective When Markets are Incomplete: Profit Maximization," Econometric Society 2004 North American Summer Meetings 141, Econometric Society.
    5. 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, pages 1-21.
    6. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
    7. Bo Rasmussen, 1996. "Imperfectly competitive factor markets and price normalization," Journal of Economics, Springer, vol. 63(2), pages 125-138, June.
    8. Thomas Renstrom & Erkan Yalcin, 2002. "Endogenous Firm Objectives," Industrial Organization 0204001, EconWPA.
    9. Thomas Renstrom & Erkan Yalcin, "undated". "Endogeneous Firm Objectives," Wallis Working Papers WP27, University of Rochester - Wallis Institute of Political Economy.
    10. Ramón Torregrosa, 2008. "Macroeconomic effects of an indirect tax substitution," Journal of Economics, Springer, vol. 94(3), pages 199-221, September.
    11. Renström, Thomas I & Yalcin, Erkan, 2002. "Endogenous Firm Objectives," CEPR Discussion Papers 3361, C.E.P.R. Discussion Papers.
    12. Ritzberger, Klaus, 2005. "Shareholder voting," Economics Letters, Elsevier, vol. 86(1), pages 69-72, January.
    13. Abbas Ali & Abdulrahman Al-Aali & Abdullah Al-Owaihan, 2013. "Islamic Perspectives on Profit Maximization," Journal of Business Ethics, Springer, pages 467-475.
    14. Klaus Ritzberger & Frank Milne, 2002. "Strategic pricing of equity issues," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 271-294.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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