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A theory of markets with return-seeking firms

Author

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  • Murray, Cameron

Abstract

Neoclassical theory erroneously makes the assumption that firms maximise profits on a fixed endowment of physical capital leading to the pervasive rule of thumb that firms produce at a level of output where marginal revenues equal marginal costs. However this is merely a special case of the general goal of firms maximising returns on all costs. Firms adopting a return-seeking strategy make decisions that are consistent with fundamental assumptions of financial analysis and outperform profit maximising firms. Introducing time and a measure of incremental capital unit into the model overcomes many limitations with mainstream analysis, particularly in relation to capital investment decisions. This new framework provides a more general model with which to consider market interactions and allows for observable pricing mechanisms, such as mark-up pricing, downward sloping cost curves at the firm level, and ignorance of marginal costs by firm managers. It also reveals that the leap between the positive descriptive model and the normative welfare implications of markets outcomes cannot be bridged by the fundamental welfare theorems.

Suggested Citation

  • Murray, Cameron, 2013. "A theory of markets with return-seeking firms," MPRA Paper 50294, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50294
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    File URL: https://mpra.ub.uni-muenchen.de/53051/1/MPRA_paper_53051.pdf
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    References listed on IDEAS

    as
    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    3. Robinson, Joan, 1972. "The Second Crisis of Economic Theory," American Economic Review, American Economic Association, vol. 62(2), pages 1-10, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Firm behaviour; pricing; return; profit; capital investment;

    JEL classification:

    • D0 - Microeconomics - - General
    • D2 - Microeconomics - - Production and Organizations
    • D20 - Microeconomics - - Production and Organizations - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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