Absolute Profit Research Articles

CONCEPTUALIZING THE CO-CREATION OF COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE B2B MARKETS: AGENT-BASED MODELING APPROACH

The importance and challenges of supplier–customer cooperation has been widely recognized in the academic literature but the dynamics of such relationship remain understudied. We do not yet fully understand how customer–supplier relationship should be pursued in order to co-create mutual competitive advantage. Our simulation results show that there are differences in absolute profitability and profit distribution between cooperation partners when moving from individual firm-level management to holistic system-based management. We further find that if the supplier manages cooperation from individualistic perspective it is able to achieve the highest short-term profits by sacrificing the profitability of its customer. However, when the supplier acknowledges the profitability logic of its customer, the long-term overall profitability of the cooperation as a whole, i. e., the system, becomes significantly higher than with opportunistic individually-oriented (short-term) management. In described cases, it is actually profitable for the supplier to limit the distribution of its unique resources (e. g., technology).

Quantity Competition and Price Competition with a Duopoly in a Consumer-Friendly Firm: A Welfare Analysis

This paper conducts a welfare analysis in a duopoly with differentiated and substitutable goods composed of one consumer-friendly firm and one absolute profit maximizing firm. We suppose that the consumer-friendly firm maximizes the weighted sum of its absolute profit and consumer surplus. In such a duopoly, when the degree of product differentiation is sufficiently high and the weight that the consumer-friendly firm puts on consumer surplus in its objective function is sufficiently high, the equilibrium social welfare is larger in the quantity competition than in the price competition, which implies that the result is reverse of that obtained in the standard duopoly with substitutable goods composed of absolute profit maximizing firms.

The tragedy of the commons in a fishery when relative performance matters

This paper presents a simple model of a common access fishery where fishermen care about relative performance as well as absolute profits. Our model captures the idea that status (which depends on relative performance) in a community influences a person's well-being. In our main specification, relative performance depends on the absolute difference in after-tax profits. We show that overharvesting resulting from the tragedy of the commons problem is exacerbated by the desire for higher relative performance, leading to a smaller steady-state fish stock and smaller steady-state profit for all the fishermen. We also consider alternative specifications where status depends on the absolute difference in harvests or relative difference in profits, or where there is heterogeneity in the degree to which status matters, or allowing for the possibility of extinction. In all these specifications, status further reduces the steady-state fish stock. We examine taxes and an individual quota as policy alternatives and find support for using the direct quantity method to implement the socially efficient stock level.

Game-theoretic approach for pricing strategy and network selection in heterogeneous wireless networks

User selection for access network is considered to be one of the distinct features of heterogeneous wireless systems, in which users with multi-network interface terminals can freely select access network for better quality of service with lower expense. On the other hand, service providers (SPs) will have to face more intense competition for attracting more subscribers and increasing their profits, which can be achieved through either non-cooperative or cooperative strategies. In this study, the authors propose a unified quantification model for evaluating the access service of heterogeneous systems. The relation between competitive SPs and users is described by different game models, based on general assumptions and practical application scenarios. A novel network selection scheme for maximising user performance–cost ratio (PCR) is proposed. Numerical results demonstrate that all SPs can achieve Nash equilibrium price under non-cooperative game framework and coalition price for cooperative game case to maximise their absolute profits, and the maximal PCR criterion for user network selection scheme is analysed under different scenarios.

Price-taking behavior versus continuous dynamic optimizing

Abstract In a quantity-competition oligopoly, previous studies have shown that a price-taking firm can outperform any rival with identical technology that produces at a different output level at any intertemporal equilibrium. This research seeks to examine this seemingly counter-intuitive fact in a heterogeneous duopoly consisting of an adaptive price-taker and a dynamic optimizer who dynamically optimizes its either absolute or relative profit stream over an infinite planning horizon. With conventional economic assumptions, the Hamiltonian system always converges to a saddle point. If goal of the dynamic optimizer is absolute profit, the price-taker produces more than the dynamic optimizer at the equilibrium, around which there exists a long-run relative profitability portion for the price-taker. Consequently, the price-taker unconsciously makes higher relative profit than the dynamic optimizer in the long-run. In contrast, if the dynamic optimizer pursues the relative profit, both firms produce at the competitive level at the equilibrium while the whole optimal path lies in the relative profitability regime of the dynamic optimizer so that it will enjoy a higher profit than the price-taker before reaching equilibrium. These results provide economical justification for ever-growing evolutionary game theoretical literatures in appreciating price-taking behavior and additionally clarify possible misunderstandings in interpreting their conclusions.

Empirical investigation of channel reactions to brand introductions

We investigate how incumbent manufacturers and retailers alter their pricing behavior in response to new product introduction. In performing our analysis, we need to be cognizant of the fact that the observed price changes can be due to entry-induced changes in a) demand conditions or b) costs or, on the other hand, to the competitive behavior of c) manufacturers and/or d) the retailer. In order to separate these four changes, we posit that manufacturer and retailer pricing is an outcome of maximizing a combination of shares and profits. This enhanced objective function allows us to measure competitive conduct benchmarked as less or more competitive than under the Bertrand-Nash framework. Our empirical analysis is based on the toothpaste category for the time period January 1993–February 1995. During this period, there were three brand introductions in two rounds of entry. Using the estimates from the demand and the supply model, we compute the changes in the retail and wholesale prices that are attributable to changes in demand conditions, manufacturer and retailer competitive conduct, and cost changes. These results support our conjecture that inferring the change in conduct solely based on a change in observed prices is likely to be erroneous. For the first new brand entry, we find that the brand introduction did not significantly increase competition between manufacturers. As a result, the balance of channel power between the manufacturers and the retailers remained unaltered. Both retailer and manufacturer profit margins increased after the first entry. However, subsequent to the second entry, retailer share of channel profits increased at the expense of the manufacturers; manufacturers even saw a decline in their absolute profit margins. We believe that this research will provide insight for manufacturers and retailers regarding how the various channel participants are likely to react to new product introduction. Furthermore, policymakers interested in understanding competitive reactions to new product introduction should find this research useful.

A MODEL OF ENDOGENOUS PAYOFF MOTIVES AND ENDOGENOUS TIMING IN A MIXED DUOPOLY*

A model of endogenous payoff motives and endogenous order of moves is analysed in a mixed duopoly. We find that, when a non‐negative price constraint is imposed on public and private firms' quantity choice, both firms always choose to be relative‐payoff‐maximisers, and both simultaneous move and sequential move can be sustained in equilibrium. In contrast, when non‐negative absolute profit constraint is imposed, public and private firms always choose to be absolute‐payoff‐maximisers, and only sequential move can be sustained in equilibrium.

Perfecting Imperfect Competition

This paper addresses the reduction of market failure under imperfect competition. It proposes a taxscheme that provides firms with an incentive to forgo their market power: Firms optimize after-tax profits. Now simply consider a firm ´s gross profit margin the unique tax-rate it is charged on absolute profits. In theory the firm ´s tax-rate would be the mark-up over marginal costs, the firm ´s Lerner index. As a result every firm determines its own tax-rate by setting its price and incurring costs. This creates a new trade off for firms between a low tax-burden and the exercising of market power. Welfare for society increases since firms with market power choose a lower price and produce a quantity closer or equal to social optimum; at the original monopolistic price-level they can increase their profits by lowering their tax-burden. Essentially the tax-condition does not seem to distort profit incentives or markets; under perfect competition the tax-rate would be zero. Thus, it is clear that the tax only takes effect when markets work inefficiently and its countervailing nature subsequently helps to remedy inefficiencies of imperfectly competitive markets.

Loss protection in pairs trading through minimum profit bounds: A cointegration approach

Pairs trading is a comparative-value form of statistical arbitrage designed to exploit temporary random departures from equilibrium pricing between two shares. However, the strategy is not riskless. Market events as well as poor statistical modeling and parameter estimation may all erode potential profits. Since conventional loss limiting trading strategies are costly, a preferable situation is to integrate loss limitation within the statistical modeling itself. This paper uses cointegration principles to develop a procedure that embeds a minimum profit condition within a pairs trading strategy. We derive the necessary conditions for such a procedure and then use them to define and implement a five-step procedure for identifying eligible trades. The statistical validity of the procedure is verified through simulation data. Practicality is tested through actual data. The results show that, at reasonable minimum profit levels, the protocol does not greatly reduce trade numbers or absolute profits relative to an unprotected trading strategy.

Role of Government in an Era of Total Quality Management (TQM) and Globalization: Challenges and Opportunities

This article addresses the changing role of government in the rapidly changing environment of globalization, a process through which worldwide integration is pursued by forces of global capitalism. Government is challenged by conflicting and contradictory forces of globalization of corporate capitalism seeking absolute profit, while at the same pressures for quality services and quality assurance are mounting worldwide. As a result, an impossibility theorem develops, with new challenges and opportunities facing governments. Alternative theories of government are presented, and suggestions are offered on what government should do to promote quality assurance and TQM in the age of globalization.

Just-in-time component replenishment decisions for assemble-to-order manufacturing under capital constraint and stochastic demand

While just-in-time ideas have been enthusiastically embraced by manufacturing practitioners, the small replenishment batch sizes advocated are difficult to reconcile with the standard management science cost trade-off approach. In a previous paper by the authors, which analysed a multi-product manufacturing scenario under deterministic demand, this difficulty was diagnosed as being due to the standard assumption that capital for inventory is borrowed and hence boundless. When inventory is financed by investors and is thus finite, the investment level must be treated as an additional variable in the decision to adopt inventory reduction policies. For lean investments which might be chosen to maximise return on investment (ROI) rather than absolute profit, or for reasons of flexibility, JIT replenishment becomes more attractive for certain components than the standard analysis would suggest because the capital formerly invested in these components can be reinvested in the inventory of the remaining batch components to improve efficiencies. This paper treats the stochastic version of the same problem, develops a tractable solution method for the decision problem, and in addition to reinforcing the findings of the previous study, reveals several other ways in which JIT replenishment and component substitution can improve performance by limiting the cost of dealing with uncertainty. The analysis is illustrated using an actual case study of a small manufacturing enterprise seeking to reduce inventory and increase ROI.

On the measurement of social orientations in the minimal group paradigm: norms as moderators of the expression of intergroup bias

AbstractContrary to most other research conducted in the minimal group paradigm tradition, Bornstein, Crum, Wittenbraker, Harring, Insko and Thibaut (1983a) found little evidence of ingroup favoritism when they employed a revised measurement system (i.e. the Multiple Alternative Matrices; MAMs). The current experiment examined whether Bornstein et al.'s effects could be attributed to norms that prohibit intergroup discrimination, which are made salient by framing the outcome values in the intergroup allocation task as monetary payment. We manipulated the salience of prohibitive norms by varying whether participants allocated on the MAMs monetary payment, bonus money or feelings. Participants more strongly associated ‘having to be fair and equal’ with payment than with bonus or feelings and category members made fewer allocations that maximized the ingroup's relative and absolute profit and more allocations that minimized intergroup differences when allocating monetary payment than when allocating bonus money or feelings. Copyright © 2001 John Wiley & Sons, Ltd.

Information and channel profits

New marketing information technologies, associated with point-of-purchase scanner systems, have increased the potential information available to manufacturers and retailers. In this paper, we explore the pricing and profit implications of this technology within a channel setting. We find that improved information about demand always results in greater absolute profits, as well as a claim on greater division of channel profits for the informed channel member. The greater profitability is due to the informed channel member's ability to “fine tune” prices in response to changes in demand conditions. However, total channel profits are highest when only one channel member acquires information. We also show that fine-tuning of price has the effect of smoothing sales, as informed firms charge higher prices during high demand periods and charge lower prices during low demand periods. Lastly, we show that an equilibrium where both channel members acquire information does not lead to a prisoners' dilemma.

Using relative profit incentives to prevent collusion

This paper describes a new economic method for preventing oligopoly collusion. The method eliminates incentives for collusion by making managerial compensation depend on relative profits rather than absolute profits. This alteration of managerial incentives sets up a zero-sum game among the firms in an industry, yielding the result that firms no longer have incentive to collude, either actually or tacitly, with regard to prices or outputs. The method also ameliorates the imperfectly competitive outcomes which can result from even noncooperative oligopoly interactions.

The Effect of Wages on Investment and Employment in a Vintage Model with Uncertain Demand

This note investigates the effect of an increase in the wage on investment and employment when demand is uncertain, and when incentives to factor substitution arise from the existence of different vintages of capital equipment. It is shown that the effect on investment is nonmonotonic and depends on the relative likelihood of demand and supply constraints. Moreover, a wage increase can have an ambiguous effect on employment, raising it in some states while reducing it in others. The effect on the expectation of employment may be positive. The model of investment presented here relates most closely to the work of Albrecht and Hart (1983), Artus and Muet (1984), Lambert and Mulkay (1987) and Moene (1985), who assume a putty-clay technology, a fixed output price, and stochastic demand. The innovation in this note is that incentives to factor substitution arise from the existence of different vintages of installed capital equipment, rather than ex ante substitutability. Investment is undertaken to economize on labour costs by replacing older equipment and to meet additional demand. Higher wages reduce the return to incremental investment in supply-constrained states, by reducing the absolute profit margin. However, a wage increase raises the return to incremental investment in demand-constrained states. Since additional output cannot be sold, new equipment can only be used for replacing older vintages and economizing on labour costs. This return depends on the difference in labour costs between old and new equipment, which is greater with higher wages. Hence a wage increase reduces the return to incremental investment if supply-constrained states are more likely, but raises *A first draft of this paper was written while I was visiting the World Institute for Develop

Social comparison and group interest in ingroup favouritism

AbstractStudied the effects of reward magnitude and comparability of the outgroup on minimal intergroup discrimination where self‐interest was related to ingroup profit. Favouritism towards own group is hypothesized to arise from intergroup comparisons to enhance self‐esteem as well as instrumental rivalry for group and self‐interest. Sixty‐two fourteen to fifteen years' old school‐boys and girls were randomly assigned to a high or low reward condition in which they distributed monetary rewards, via choice‐matrices, to the ingroup and a relevant comparison outgroup, and the ingroup and an irrelevant comparison outgroup. Monetary self‐interest was explicitly and directly linked to ingroup's absolute profit. Ss sacrificed group and personal gain to achieve intergroup differences in monetary outcomes favouring the ingroup; and were less fair and more discriminatory towards the relevant than irrelevant outgroup. especially with High Rewards.

Comparison of construction costs in the United Kingdom and Hungary

This paper examines the endogenous choice problem of each firm's price or quantity contract in a mixed duopoly composed of one social welfare maximizing public firm and one relative profit-maximizing private firm. In this paper, we show that unless the degree of product differentiation and the degree of importance of the private firm's relative performance are low, the quantity competition can analytically become the unique equilibrium market structure on the basis of the dominant strategies of the public firm and the private firm when the degree of importance of firm 1's relative performance is sufficiently high. This result contrasts strikingly with that obtained in a standard mixed duopoly composed of one social welfare-maximizing public firm and one absolute profit maximizing private firm. In addition, even in the area wherein both the degree of product differentiation and the degree of the private firm's relative performance are sufficiently low, through numerical simulations, the quantity competition tends to become the unique equilibrium market structure when the degree of importance of the private firm's relative performance is sufficiently high, whereas the price competition tends to become the unique equilibrium market structure when the degree of importance of the private firm's relative performance is sufficiently low.

Application of a Mathematical Concept of Risk to Property-Liability Insurance Ratemaking

Mr. Lange's thought provoking paper' has highlighted an apparent deficiency in property-liability ratemaking. The paper also opens Pandora's box a bit further as far as large segments of the industry are concerned because properly incorporating risk into the ratemaking process requires reconsideration of the formula. Even some of the extensions suggested in Mr. Lange's paper are deficient since they permit only a determination of relative risks, but not an indication of a proper absolute profit.2 The determination of appropriate profit provisions is a matter that large segments of the insurance industry have avoided successfully for many years. Such a determination in a price regulated industry, according to economic theory,3

ANALYSIS OF THE GENERATION OF PRICE INFLATION: A STUDY OF COST AND PRICE CHANGES IN THE UNITED KINGDOM, 1946–54 1

(1) This paper is a statistical analysis of cost and price changes since the war, and tries to explain why prices rose. (2) Part I presents estimates of the price (average value) of total final outlay, which are derived (see Table I) with minor adjustment from the official estimates of national income and expenditure. Separate estimates are given of the price of business output gross of imported material content but net of indirect taxes. Final prices are estimated to have risen 48 per cent. between 1946 and 1954. Of this the import-cost component accounts for almost one-quarter, labour costs for almost one-half, and unit gross profit margins for about one-fifth (see Table V). Similar analysis is made of the rise in the price and costs of 'business output'. There is reason to believe, however, that these cost components were themselves interrelated, i.e. wages (and hence labour costs) rose when prices rose; and absolute profit increases were associated with rising costs. (3) Part II attempts to carry the analysis farther by exploring these interrelationships. A hypothesis is first proposed, cast for convenience in the form of an algebraic model, consisting basically of two assumptions concerning the behaviour of labour costs and profits respectively: namely, that previous prices are a main influence on money wages and salaries, and that prices are mainly determined by previous (labour plus import) costs. If such a system inherits a rising price trend, or has injected into it a rise in import costs, it will tend to generate a sequence of rising prices in subsequent periods. Unless all costs increase in proportion, the sequence will be damped. It is shown that a rising trend of productivity can act as a powerful damping factor, but only if real wages and salaries (or, more strictly, the excess of increases in money incomes over lagged price changes) increase less rapidly than productivity. (4) Room is left in the formulation of the model for the possible influence, both upon labour costs and profits, of changes in the pressure of demand. Examination of the actual behaviour of labour costs and of profits suggests that demand is capable of modifying the responses of the system at each stage; but it seems unlikely that such modifications would completely offset strong cost impulses. If this is correct, the model can still be used as a tool of analysis. (5) An attempt is then made to see how far the historical development can be explained in these terms. It is difficult to know how much labour costs would have