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Profit Maximization, Relative Prices, and the Maximization of Shareholders' Real Wealth

  • Egbert Dierker

    (University of Vienna)

  • Birgit Grodal

    (Institute of Economics, University of Copenhagen)

General equilibrium models of oligopolistic competition give rise to relative prices only without determining the price level. It is well known that the choice of a numéraire or, more generally, of a normalization rule converting relative prices into absolute prices entails drastic consequences for the Nash equilibria. In this paper we show that, given a firm has chosen a particular profit function as its objective, profit maximization can be expressed in such a way that it depends on relative prices only. However, the choice of such an objective function need not be in the interest of the shareholders. This problem is overcome by relating the profits of a firm to the expenditure of its shareholders. We define the maximization of shareholders' real wealth as the objective of a firm. This concept is based on profits and on shareholders' expenditures. Moreover, it depends on relative prices only rather than on arbitrary price normalizations, which cannot be derived from the economic structure of the model. As a result there is no need for absolute prices in the theory of imperfect competition.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 95-07.

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Length: 24 pages
Date of creation: Jun 1995
Date of revision:
Handle: RePEc:kud:kuiedp:9507
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