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A Test of Profit Maximization

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  • Asplund, Björn Marcus

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.

Suggested Citation

  • Asplund, Björn Marcus, 2007. "A Test of Profit Maximization," CEPR Discussion Papers 6177, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6177
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    References listed on IDEAS

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    Cited by:

    1. Andersen, Per & Vetter, Henrik, 2015. "Pricing as a risky choice: Uncertainty and survival in a monopoly market," Economics Discussion Papers 2015-53, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    firm behaviour; profit maximization;

    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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