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Price Uncertainty, The Competitive Firm and the Dual Theory of Choice Under Risk

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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.

Suggested Citation

  • Fanny Demers & Michel Demers, 1989. "Price Uncertainty, The Competitive Firm and the Dual Theory of Choice Under Risk," Carleton Industrial Organization Research Unit (CIORU) 89-09, Carleton University, Department of Economics.
    • Handle: RePEc:car:ciorup:89-09
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Hadar, Josef & Seo, Tae Kun, 1995. "Asset diversification in Yaari's dual theory," European Economic Review, Elsevier, vol. 39(6), pages 1171-1180, June.
    5. Bahram Adrangi & Kambiz Raffiee, 1999. "On Total Price Uncertainty and the Behavior of a Competitive Firm," The American Economist, Sage Publications, vol. 43(2), pages 59-65, October.
    6. Volij, Oscar & Winter, Eyal, 2002. "On risk aversion and bargaining outcomes," Games and Economic Behavior, Elsevier, vol. 41(1), pages 120-140, October.
    7. Demers, Fanny S. & Demers, Michel, 1994. "Prudence, demand uncertainty background risk and the law of supply : anonexpected utility approach to the firm," CEPREMAP Working Papers (Couverture Orange) 9425, CEPREMAP.
    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.
    10. 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.
    11. Jean-Louis ARCAND, 2006. "Pessimism, Optimism and Credit Rationing," Working Papers 200620, CERDI.
    12. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.

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