Profit Maximization, Relative Prices, and the Maximization of Shareholders' Real Wealth
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.
(This abstract was borrowed from another version of this item.)
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||May 1995|
|Date of revision:|
|Note:||Replaced by working paper 9706.|
|Contact details of provider:|| Web page: http://www.univie.ac.at/vwl|
When requesting a correction, please mention this item's handle: RePEc:vie:viennp:vie9503. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paper Administrator)
If references are entirely missing, you can add them using this form.