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Variability and average profits - does Oi's result generalize?

Author

Listed:
  • Friberg, Richard

    () (Dept. of Economics, Stockholm School of Economics)

  • Martensen, Kaj

    (Dept. of Economics, Stockholm School of Economics)

Abstract

Average profits of a price taker are increasing in the variability of the output price (Oi, 1961). We show that, for the same reason, average profits of the price taker are increasing in the variability of the price of inputs. We proceed to establish that the same holds for a firm with a downward sloping demand curve. Unless the inverse demand curve of the firm with market power is very convex, the profit function of the price taker forms an upper limit for the convexity of profit (assuming constant curvature of costs).

Suggested Citation

  • Friberg, Richard & Martensen, Kaj, 2000. "Variability and average profits - does Oi's result generalize?," SSE/EFI Working Paper Series in Economics and Finance 402, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0402
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    Cited by:

    1. Mohamed Jellal & Fran├žois-Charles Wolff, 2005. "Free Entry under Uncertainty," Journal of Economics, Springer, vol. 85(1), pages 39-63, July.

    More about this item

    Keywords

    cost uncertainty; convexity of profit function;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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