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Non-linear revenue evaluation in oligopoly

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Abstract

In this article we investigate oligopolies where firm decision makers have multiple objectives. We focus on cases where the decision maker is incentivized by profit, and by revenue. Our innovation—motivated by the internal scrutiny that is often placed on revenue—is that managers derive utility from revenue in a potentially non-linear fashion. This allows for incremental changes in revenue to have different incentive effects when it comes to production choice, depending on the amount of revenue generated by the firm. We show that this intuitively appealing extension to the revenue maximisation model reverses some conventional results of that model: we derive conditions where decision makers may actually increase output in the presence of demand contractions. Whether a decision maker increases or decreases output in the presence of a demand shock depends on the concavity of their utility function with respect to revenue. Our findings help us in understanding cases of output growth in the presence of negative demand shocks.

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  • Alex Dickson & Ian A. MacKenzie & Petros G. Sekeris, 2019. "Non-linear revenue evaluation in oligopoly," Discussion Papers Series 611, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:611
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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June.
    3. Alex Dickson, 2013. "The Effects of Entry in Bilateral Oligopoly," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-21, June.
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    More about this item

    Keywords

    Oligopoly; non-profit maximization; delegation;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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