Aggregate Profit Research Articles

Empirical models of manufacturer-retailer interaction: A review and agenda for future research

The nature of the interaction between manufacturers and retailers has received a great deal of empirical attention in the last 15 years. One major line of empirical research examines the balance of power between them and ranges from reduced form models quantifying aggregate profit and other related trends for manufacturers and retailers to structural models that test alternative forms of manufacturer-retailer pricing interaction. A second line of research addresses the sources of leverage for each party, e.g., trade promotions and their pass-through, customer information from loyalty programs, manufacturer advertising, product assortment in general, and private label assortment in particular. The purpose of this article is to synthesize what has been learnt about the nature of the interaction between manufacturers and retailers and the effectiveness of each party’s sources of leverage and to highlight gaps in our knowledge that future research should attempt to fill.

Vertical separation versus vertical integration in a macroeconomic model with imperfect competition

This paper develops a monopolistic competition macroeconomic model, and uses it to discuss the determination of relevant macro variables under both vertical separation and vertical integration regimes. Several main findings emerge from the analysis. First, in the market equilibrium aggregate output and consumption under the vertical integration regime are greater than under the vertical separation regime, while the product price index under the vertical integration regime is lower than that under the vertical separation regime. Secondly, the level of real aggregate profits under the vertical integration regime will be higher (lower) than that under the vertical separation regime if the degree of monopoly power is relatively large (small). Third, the welfare level under the vertical integration regime will be higher than that under the vertical separation regime regardless of the degree of monopoly power.

Health Insurance as a Productive Factor

In this paper, we present a less-explored channel through which health insurance impacts productivity: by offering health insurance, employers reduce the expected time workers spend out of work in sick days. Using data from the Medical Expenditure Panel Survey (MEPS), we show that a worker with health coverage misses on average 52% fewer workdays than uninsured workers, after controlling for endogeneity. We develop a model that embodies this impact of health coverage in productivity. In our model, health insurance reduces the probability that a healthy worker gets sick, missing workdays, and it increases the probability that a sick worker recovers and returns to work. In our model, firms that offer health insurance are larger and pay higher wages in equilibrium, a pattern observed in the data. We calibrated the model using US data for 2004 and show the impact of increases in health costs, as well as of changes in tax benefits of health insurance expenses, on labor force health coverage and productivity. Finally, we show that a government mandate that forces firms to offer health insurance increases average wages and aggregate productivity while reducing aggregate profits, ultimately having a positive impact on welfare.

The Bush Business Cycle Profit Rate: Support in a Theoretical Debate and Implications for the Future

This paper looks at the most recent aggregate profit rate data for the United States. It then makes five arguments. First, the new data reinforce the rejection of “neoliberalism as successful capitalist restructuring that could possibly restore or surpass the pre 1970s rate of profit.” Second, when the new data are viewed together with the rest of the post-WWII data, it reinforces the appearance of the fall in the rate of profit as a one-step fall between an earlier and a later period. Third, this result argues against understanding the fall in the rate of profit in terms of an increasing organic composition of capital. Fourth, the one-step fall understanding is consistent with understanding profit rate dynamics in terms of the change of economic regimes between the “Keynesian compromise” period and the neoliberal period. These first four results are all consistent with, though certainly not broad enough to claim to be a proof of all of, the recently reformulated social structures of accumulation theory by Kotz and Wolfson. Finally, when the new data are considered together with several now widely held general beliefs about the near-term performance of the U.S. economy, this paper makes arguments about some likely characteristics of the behavior of the aggregate profit rate over the next business cycle.

BIOTECHNOLOGY New report sees dry capital markets shrinking the sector

Although the global biotechnology industry fared well in 2008, the recession is likely to spark consolidation in the year ahead as traditional sources of public funding go into long-term decline. Thus states Ernst & Young’s annual report on the industry. The consulting firm found that revenues of publicly traded biotech firms grew 12% to $90 billion in 2008. The global industry’s net loss shrank from $3.0 billion in 2007 to $1.4 billion last year, and the U.S. industry reached aggregate profitability for the first time. Capital raised by publicly traded firms in the U.S. and Europe declined by 46%, however, to $16 billion in 2008. Funding for initial public offerings fell 95% to $116 million; other forms of public funding also dropped off almost entirely. Venture capital funding, on the other hand, remained relatively strong last year, falling only 19% from 2007’s all-time record of $6 billion. Glen T. Giovannetti, who coauthored the report, says ...

Mind the (Approximation) Gap: A Robustness Analysis

This note continues the discussion of the results reported by Ricardo Caballero and Eduardo Engel (1993), hereafter CE, and Ricardo Caballero, Eduardo Engel, and John Haltiwanger (1997), hereafter CEH, by responding to the results reported in Christian Bayer (2008). Russell Cooper and Jonathan Willis (2004), hereafter CW, find that the aggregate nonlinearities reported in CE and CEH may be the consequence of mismeasurement of the employment gap rather than nonlinearities in plant-level adjustment. Bayer reassesses this finding in the context of the CE model in the case where static employment gaps are observed and concludes that the CW result is not robust to alternative shock processes. We concur with Bayer's assessment that the nonlinearity finding is sensitive to the aggregate profitability shock process. We argue, however, that Bayer's finding does not imply that the mismeasurement problem goes away. Instead, the nonlinearity created by mismeasurement is directly related to the level of the aggregate shock. Once the empirical specification properly incorporates the aggregate shock, the nonlinearity test is robust to alternative shock processes and confirms the results in CW. More importantly, we demonstrate that the CW findings are robust to alternative shock processes for the natural case of unobserved gaps as examined by CE and CEH.

Fiat without Authority under Vertical Integration

This paper develops a relational contracting model to show how fiat - a principal's ability to dictate her agent's performance - emerges in equilibrium under vertical integration, even when integration does not allocate distinctive formal authority to the principal. In a vertical structure, an efficient relational contract requires the downstream manager to take actions that maximize agrregate profits, in exchange for future rents. If the manager of a vertically integrated unit reneges, she benefits from greater free time, but does not appropriate the associated increase in unit profits. Therefore, when the actions that maximize aggregate profits and the individual unit's profits differ substantially - that is, when interest conflicts and spillovers between units are large - the manager's promise to perform will be more credible under vertical integration than under separation.

A Study of Environmental Management Investment Allocation

The 21st century is a new century of environmental protection. Environmental protection is one of the most important subject matters yet to come. Moreover, as the public pays more attention to environmental problems, enterprises should increase their investment in environmental management. Therefore, determining the investment level for environmental management and allocating the investment to associated environmental management activities has become a major task. The principal and agent theory and sales response functions are used for analysis in this research. The allocation of capital investment in environmental management is found to have significant impact on the aggregate sales response, aggregate profit and investment level. Therefore, in preparing the budget for environmental management, enterprises should focus on investment allocation decisions, determine the investment level and allocation method using integrated means, and apply submarket data in the allocation decision‐making process. In other words, in setting the investment level, executive management should take managers’ willingness into consideration. In allocating capital investment, managers should identify the optimal allocation method based on submarket characteristics.

A Static Approximation for Dynamic Demand Substitution with Applications in a Competitive Market

We propose a static approximation of dynamic demand substitution behavior based on a fluid network model and a service-inventory mapping. This approximation greatly enhances our ability to analyze the interdependent inventory/service, price, and product assortment decisions in noncompetitive and competitive scenarios with demand substitution. We demonstrate that the approximation is well behaved and then apply it to two previously intractable applications. First, we study a price and service competition between single-product retailers. After establishing a unique pure-strategy Nash equilibrium, we find that competition results in lower price, higher demand, and a higher level of inventory. We also observe that the aggregate profit and inventory level increase to positive constants as the number of retailers goes to infinity. Second, we study a duopolistic competition on price, service, and product assortment. We establish a pure-strategy Nash equilibrium for the product assortment competition and identify a condition for uniqueness. We find that competition on both price and product assortment results in lower price and less variety for each competitor, but the total number of products and the aggregate inventory level in a duopoly market are both likely to be higher than in a monopolistic market.

Analysis of decision-making in economic chaos control

In some economic chaotic systems, players are concerned about whether their performance is improved besides taking some methods to control chaos. In the face of chaos occurring in competition, whether one player takes controlling measures or not affects not only their own earning but also other opponents’ income. An output duopoly competing evolution model with bounded rationality is introduced in this paper. Using modern game theory, decision-making analyses about chaos control of the model are taken by taking aggregate profits as players’ payoff. It is found that the speed of players’ response to the market and whether the decisive parameters are in the stable region of the Nash equilibrium or not have a distinct influence on the results of the game. The impact of cost function’ type on results of the game is also found. The mechanism of influences is discovered by using numerical simulation.

Gender Disparities in Employment and Aggregate Profitability in the United States

We explore the relationships between aggregate profitability and women's growing share of market work in the United States during the 1980s and 1990s. Using decomposition analysis and counterfactuals, we investigate whether the contribution of the declining wage share to the upswing in profitability was aided by the growing incorporation of women into the workforce. Results show that women helped to moderate the decline in the aggregate wage share. The counterfactuals suggest that the reduction in gender pay disparity overwhelmed the negative effect of women's growing share of market work on the wage share. The decline in the wage share was driven primarily by distributional changes within the sectors rather than by changes in the composition of value added. In sectors where wage shares fell, however, women did not restrain the fall, indicating that the aggregate outcome was the net result of distinct sectoral trends in women's employment.

Profitability of Western European Banking Systems: Panel Evidence on Structural and Cyclical Determinants

This paper analyses structural and cyclical determinants of banking profitability in 16 Western European countries. We find that financial structure matters, particularly through the beneficial effect of the capital market orientation in the respective national financial system. Furthermore, higher diversification regarding banks' income sources shows a positive effect. The industry concentration of national banking systems, though, does not significantly affect aggregate profitability. Business cycle effects, in particular lagged GDP growth, display a substantial procyclical impact on bank profits. These results are obtained in a single equation panel framework using the Hausman-Taylor instrument variable estimator. The data set comprises aggregate annual country data and banking group data (commercial banks, cooperative banks and savings banks) over the period 1979-2003.

A Question So Important that it Should Be Hard to Think about Anything Else

While the simple investment principles espoused 60 years ago by Benjamin Graham remain valid today, investment strategies have become far more active, as the financial sector has come to play a dominant role in our economy. Mutual funds have become less diversified; their portfolio turnover has risen sixfold; and investors now hold fund shares for dramatically shorter periods. Fund expense ratios have risen sharply, a manifestation of the soaring costs of the U.S. financial sector, estimated at $528 billion in 2007. Financial sector earnings have risen commensurately, to more than $200 billion, contributing as much as one-third of the aggregate profits of the S&amp;P 500. As gross return in the financial markets, minus the costs of intermediation, must equal the net return delivered to investors, such costs constitute a substantial drag on investor wealth. Yet both the profession and the academic community have largely ignored systemwide costs. It is high time for an in-depth study of the costs and benefits of our financial system, to ensure that it functions in the national public interest and in the interest of investors. <b>TOPICS:</b>Financial crises and financial market history, exchanges/markets/clearinghouses, mutual fund performance

The Knowledge Network and Learning in a Competitive Environment : A Learning Region Model

We examine the structure of the knowledge network to investigate the role of organizational learning in production activities. We develop a knowledge learning model in an industrial sector based in a competitive framework. The contribution of learning is modeled as a Cobb-Douglas production function with interactions. The welfare performance of the industrial sector is evaluated by aggregate profit. The dynamic processes of the knowledge network are analyzed with the interactive firms maximizing profits as a non-cooperative game. In the numerical simulation, the relationship between the time delay of interactive learning and the distance decay of knowledge spillovers in a space is explored. The optimal size of a learning region is shown.JEL Classification: C70, D83, O31, R11, R15

Agricultural Production Clubs: Viability and Welfare Implications

Consumers are, in general, less informed than producers about the quality of agricultural goods. To reduce the information gap, consumers can rely on certification that ensures the quality and origin of the goods. Certification can be voluntarily adopted by a group of producers, as is the case for geographical indications. We model such a group as a club, and analyze the certification decision of the club and its welfare implication. We find that for intermediate values of certification costs, the industry and a club of a given size have divergent incentives, and there may be overprovision of certification. If club members can erect barriers to entry, an optimal size of the club exists. There may be a conflict between the efficient outcome (that maximizes the aggregate profit of the firms) and the equilibrium, which may be socially undesirable. In the absence of a barrier to entry, it is less likely that a club will emerge.

Profitability of winter wheat production influenced by liming and fertilization

Conducted experiments confirmed that fertilization and liming effected yield and production profitability regardless to considering impact of liming and fertilization as single or aggregate effect. The aggregate impact of liming and fertilization increased yield from 2,7 (control) to 6,7 t ha−1 in 2004 year and single effect of liming or fertilization increased yield from 4,7 to 5,5 or from 2,0 to 6,8 t ha−1, respectively in 2005 year. Cost analysis showes that share of fertilizer in total production costs were from 7% (liming) up to 55% (doubled liming and phosphorus fertilization). Moreover, costs calculation based on computer model for optimal fertilization implicates lower costs and higher profitability of wheat production. The aggregate profit analysis for all three experiments verified significantly lowest profit on control treatments, while any fertilization or liming treatment would increase profit. Optimal fertilization on all three sites would result in doubled profit.

New results on stable region of Nash equilibrium of output game model

We obtains that the real stable region of Nash equilibrium of output game model is smaller than that in general. Because of the prisoners’ dilemma, players would not select some of the values of parameters, though those points of parameters’ orbit will tend to the Nash equilibrium point. That is, players’ strategies are unstable in those values. In order to discuss this problem, we introduce a duopoly output dynamical model. We use numerical simulation to analyze the initial output and the decisive parameters’ influences on the speed of the system’s evolution convergence to Nash equilibrium, and we measure performances of the model in various period states and chaotic state by using the index of average profits. It is found that the optimal strategy locates in the stable region of Nash equilibrium, and aggregate profits are not sensitive to initial output in certain neighborhood of Nash equilibrium and the decisive parameters in their majority of stable region of Nash equilibrium neither. Impact of the decisive parameters on the speed of the initial output convergent to Nash equilibrium and the prisoners’ dilemma in game theory are the main reason yielding uneven parts in both sides of 3-dimensions simulation figure. The projection of the even parts of the 3-dimensions simulation on the plane of parameters is the real stable region of the Nash equilibrium point. It is necessary to ascertain the stable region of Nash equilibrium point by combining the Jury’ condition with some performance indices in economic systems, such as average profit, aggregate profits, aggregate sales revenues and so on. We may determine the factual stable region by using the indifference character of utilities of players in the traditional stable region given by Jury’s condition. We also obtain that players should pay attention to the performance of economic entity in various period states.

PHARMA TAKES ACTION

THE PHARMACEUTICAL industry's recurring laments of generic competition, weak sales, and pipeline setbacks reached a crescendo in the fourth quarter of 2006. Profits fell overall for U.S. companies and failed to make the customary double-digit gains at European firms. Pfizer and AstraZeneca responded with action plans, and analysts see further restructuring on the horizon. Yet even in the midst of the shake-up, analysts see light at the end of the tunnel; the industry appears to be at the end of a wave of patent expirations on major products, and the new-drug pipeline is looking a little healthier heading into 2007. The average 2006 fourth-quarter profit margin for the 13 big drug companies tracked by C&EN dipped to 19.6%, compared with 20.7% in fourth-quarter 2005. Average sales growth came in at 5.8%, while earnings growth was virtually flat at 0.3%. For the full year, the aggregate profit margin was 23.0%, compared with 22.2% in 2005. ...

Aggregate Profit-Based Caching Replacement Algorithms for Streaming Media Transcoding Proxy Systems

This work derives a generalized video object profit function from the extended weighted transcoding graph to calculate the individual cache profit of certain versions of a video object, and the aggregate profit from caching multiple versions of the same video object. This proposed function takes into account the popularity of certain versions of an object, the transcoding delay among versions, and the average duration of access of each version. Based on the profit function, cache-replacement algorithms are proposed to reduce the startup delay and network traffic by efficiently caching video objects with the most profits. Two kinds of simulations were conducted to evaluate the performance of the proposed algorithms. These simulations exploit partial viewing traces and complete viewing traces, separately. The results demonstrate that the proposed algorithms outperform the competing algorithms by 15%-39% in delay saving ratio and 5%-10% in byte-hit ratio

Profitability of Western European Banking Systems: Panel Evidence on Structural and Cyclical Determinants

This paper analyses structural and cyclical determinants of banking profitability in 16 Western European countries. We find that financial structure matters, particularly through the beneficial effect of the capital market orientation in the respective national financial system. Furthermore, higher diversification regarding banks' income sources shows a positive effect. The industry concentration of national banking systems, though, does not significantly affect aggregate profitability. Business cycle effects, in particular lagged GDP growth, display a substantial procyclical impact on bank profits. These results are obtained in a single equation panel framework using the Hausman-Taylor instrument variable estimator. The data set comprises aggregate annual country data and banking group data (commercial banks, cooperative banks and savings banks) over the period 1979-2003.