Instantaneous Profit Research Articles

Investment in two alternative projects with multiple switches and the exit option

This paper uses an analytical framework to examine a firm’s investment and switching strategy under uncertainty. The context is the possibility to launch and operate two distinct projects, one at a time, with exposure to a stochastic exogenous price. We allow for multiple switches between the two projects, along with abandonment options from each. These possibilities fundamentally influence the operational strategy. We show that under some conditions, a dichotomous waiting region may arise at the investment stage. In this case we have an inaction region, for a range of prices in a certain bounded interval, where the firm does not invest and waits to have more information about the price evolution. This region vanishes for a high level of uncertainty. Additionally, the firm may operate with a negative instantaneous profit. We prove that investment in this region is never optimal. Numerical examples enable comparative statics, while extension to allow for time-to-build is included.

Renewable resource use with imperfect self-control

We investigate renewable resource use when the harvesting agents face self-control problems. Individuals are conceptualized as dual selves. The rational long-run self plans for the infinite future while the affective short-run self desires to maximize instantaneous profits or utility. Depending on the degree of self-control, actual behavior is partly driven by short-run desires. In a model of a single harvesting agent (e.g. a fishery), we discuss how self-control problems affect harvesting behavior, resource conservation, and sustainability and discuss policies to curb overuse and potential collapse of the resource due to limited self-control. We then extend the model to several harvesting agents and show how limited self-control exacerbates the common pool problem. Finally, we investigate heterogenous agents and show that there are spillover effects of limited self-control in the sense that perfectly rational agents also behave less conservatively when they interact with agents with imperfect self-control.

A Non-Cooperative Resource Utilization Game Between Two Competing Malware

In this letter, we consider a population of digital nodes (such as phones, computers, etc.) that are under the attack of two competing malware. These malware infect the nodes in order to exploit their computational resources for specific purposes such as mining crypto-currency, cloud computing, etc. We suppose that each virus spreads following the susceptible-infected-susceptible (SIS) compartmental model. Additionally, we assume that the malware designers can tune the percentage of resource utilization from their host nodes. A higher resource utilization implies a higher instantaneous profit but will also lead to faster detection and elimination (node recovery) of the malware. Once the malware is detected, complete protection of the infected node by means of anti-malware software is also possible at a smaller rate. The proposed setup results in a non-cooperative game between the two players (the malware designers) trying to maximize their profit i.e., the resources utilized from the infected nodes. We characterize and analyze the Nash equilibrium for such a game using a time-scale separation approximation. Finally, we numerically validate the approximation and we compute the price of anarchy.

Pricing without no-arbitrage condition in discrete time

In a discrete time setting, we study the central problem of giving a fair price to some financial product. This problem has been mostly treated using martingale measures and no-arbitrage conditions. We propose a different approach based on convex duality instead of martingale measures duality: The prices are expressed using Fenchel conjugate and bi-conjugate without using any no-arbitrage condition. The super-hedging problem resolution leads endogenously to a weak no-arbitrage condition called Absence of Instantaneous Profit (AIP) under which prices are finite. We study this condition in detail, propose several characterizations and compare it to the usual no-arbitrage condition NA.

Self-respecting worker in the gig economy: A dynamic principal-agent model

We introduce a dynamic principal-agent model to understand the nature of contracts between an employer and an independent gig worker. We model the worker's self-respect with an endogenous backward-looking participation constraint; he accepts a job offer if and only if its utility is at least as large as his reference value, which is based on the average of previously realized wages. If the dynamically changing reference value capturing the worker's demand is too high, then no contract is struck until the reference value hits a threshold. Below the threshold, contracts are offered and accepted, and the worker's wage demand follows a stochastic process. We apply our model to perfectly competitive and monopsonistic labor market structures and investigate first-best and second-best solutions. We show that a far-sighted employer with market power may sacrifice instantaneous profit to regulate the agent's demand. Moreover, the far-sighted employer implements increasing and path-dependent effort levels. Our model captures the worker's bargaining power by a vulnerability parameter that measures the rate at which his wage demand decreases when unemployed. With a low vulnerability parameter, the worker can afford to go unemployed and need not take a job at all costs. Conversely, a worker with high vulnerability can be exploited by the employer, and in this case our model also exhibits self-exploitation.

Renewable Resource Use with Imperfect Self-Control

We investigate renewable resources use when the harvesting agents face self-control problems. Individuals are conceptualized as dual selves. The rational long-run self plans for the infinite future while the affective short-run self desires to maximize instantaneous profits or utility. Depending on the degree of self-control, actual behavior is partly driven by short-run desires. This modeling represents impatience and present bias without causing time inconsistent decision making. In a model of a single harvesting agent (e.g. a fishery), we discuss how self-control problems affect harvesting behavior, resource conservation, and sustainability and discuss policies to curb overuse and potential collapse of the resource due to present-biased harvesting behavior. We then extend the model to several harvesting agents and show how limited self-control exacerbates the common pool problem. Finally, we investigate heterogenous agents and show that there are spillover effects of limited self-control in the sense that perfectly rational agents also behave less conservatively when they interact with agents with imperfect self-control.

Ride-Sourcing modeling and pricing in non-equilibrium two-sided markets

Ride-sourcing is a prominent transportation mode because of its cost-effectiveness and convenience. It provides an on-demand mobility platform that acts as a two-sided market by matching riders with drivers. The conventional models of ride-sourcing systems are equilibrium-based, discrete, and suitable for strategic decisions. This steady-state approach is not suitable for operational decision-making where there is noticeable variation in the state of the system, denying the market enough time to balance back into equilibrium. We introduce a dynamic non-equilibrium ride-sourcing model that tracks the time-varying number of riders, vacant ride-sourcing vehicles, and occupied ride-sourcing vehicles. The drivers are modeled as earning-sensitive, independent contractor, and self-scheduling and the riders are considered price- and quality of service-sensitive such that the supply and demand of the ride-sourcing market are endogenously dependent on (i) the fare requested from the riders and the wage paid to the drivers and (ii) the rider’s waiting time and driver’s cruising time. The model enables investigating how the dynamic wage and fare set by the ride-sourcing service provider affect supply, demand, and states of the market such as average waiting and search time especially when drivers can freely choose their work shifts. Furthermore, we propose a controller based on the model predictive control approach to maximize the service provider’s profit by controlling the fare requested from riders and the wage offered to drivers to satisfy a certain quality of market performance. We assess three pricing strategies where the fare and wage are (i) time-varying and unconstrained, (ii) time-varying and constrained so that the fare is higher than the wage such that the instantaneous profit is positive, and (iii) time-invariant and fixed. The proposed model and controller enable the ride-sourcing service provider to offer a wage to the drivers that is higher than the fare requested from the riders. The result demonstrates that this myopic loss can potentially lead to higher overall profit when customer demand (i.e., riders who may opt to use the ride-sourcing system) increases while the supply of ride-sourcing vehicles decreases simultaneously.

Relationship between biodiversity and agricultural production

AbstractThe intensification of agriculture is one of the main causes of biodiversity loss. We model the interdependent relationship between agriculture and wild biodiversity providing regulating services to agriculture on farmed land. We suppose that while agriculture has a negative impact on wild biodiversity, the latter can increase agricultural production. Farmers act as myopic agents, who maximize their instantaneous profit without considering the negative effects of their practice on the evolution of biodiversity. Two unexpected results arise (a) a tax on inputs can have a positive effect on yield since it can be considered as a social signal helping farmers to avoid myopic behavior concerning the positive effect of biodiversity on yield; (b) increasing biodiversity productivity, a proposal of ecological intensification, affects negatively the level of biodiversity, a counter‐intuitive result; due to the fact that when biodiversity is more productive, farmers can maintain lower biodiversity to get the same yield.Recommendations for Resource Managers In this study, we present a model to describe the interdependent relationship between farming activity and biodiversity on farmed land. Besides considering the negative impact of agriculture on biodiversity, models should take into account the fact that biodiversity can increase production. In contrast to what is generally expected, the tax can have a positive effect on yield because the tax can be considered as a social signal helping farmers to avoid myopic behavior in regard to the positive effect of biodiversity on yield, discounting its future positive effect. Moreover, increasing the productivity of wild biodiversity, which provides ecosystem services favorable to agriculture, a proposal of ecological intensification, can be detrimental to such biodiversity.

Ride-Sourcing Modeling and Pricing in Non-Equilibrium Two-Sided Markets

Abstract Ride-sourcing is a prominent transport mode because of its cost-effectiveness and convenience. It provides an on-demand mobility platform that acts as a two-sided market by matching riders with drivers. The conventional models of ride-sourcing systems are based on equilibrium assumption, discrete, and suitable for strategic decisions. This steady-state approach is not suitable for operational decision-making where there is noticeable variation in the state of the system, denying the market enough time to balance back into equilibrium. We introduce a dynamic non-equilibrium ride-sourcing model that tracks the time-varying number of riders, vacant ride-sourcing vehicles, and occupied ride-sourcing vehicles. The drivers are modeled as earning-sensitive, independent contractor, and self-scheduling and the riders are considered price- and quality of service-sensitive such that the supply and demand of the ride-sourcing market are endogenously dependent on (i) the fare requested from the riders and the wage paid to the drivers and (ii) the rider’s waiting time and driver’s cruising time. The model enables to investigate how dynamic wage and fare set by the ride-sourcing service provider affect supply, demand, and states of the market such as average waiting and search time especially when drivers can freely choose when to start and finish working. Furthermore, we propose a controller based on the model predictive control approach to maximize the service provider’s profit by controlling the fare requested from riders and the wage offered to drivers to satisfy a certain quality of market performance. We assess three pricing strategies where the fare and wage are (i) time-varying and unconstrained, (ii) time-varying and constrained so that the fare is higher than the wage such that the instantaneous profit is positive, and (iii) time-invariant and fixed. The proposed model and controller enable the ride-sourcing service provider to offer a wage to the drivers that is higher than the charged fare from the riders. The result demonstrates that this myopic loss can potentially lead to higher overall profit when customer demand rate who may opt to use the ride-sourcing system increases while the demand of ride-sourcing vehicles decreases simultaneously.

Security investment and information sharing in the market of complementary firms: impact of complementarity degree and industry size

We study a differential game of information security investment and information sharing in a market consisting of n complementary firms. Two game approaches, the non-cooperative game and the totally cooperative game, are employed to investigate the steady state strategy of each firm. Under certain conditions, a unique steady state can be obtained for both games. We find that the steady state security investment and information sharing level are not always less in the non-cooperative game than that in the totally cooperative game. In addition, some theoretical analyses are made on the impacts of the complementarity degree and industry size on firms’ steady state strategies for both games. Finally, some numerical experiments are conducted to give some insights related to the instantaneous profit in the steady state. It can be found that a firm will obtain more instantaneous profit in the steady state of the totally cooperative game than that of the non-cooperative game, which emphasizes the importance of coordinating strategies. The effects of the complementarity degree and industry size on the instantaneous profits in the steady state are also obtained through the numerical experiment results.

IPO underpricing in supply and demand framework: evidence from a market of retailers

ABSTRACTHow do supply, demand and allocation of shares on the underpricing of initial public offerings (IPOs) affect the shape and steepness of supply and demand curves? Theoretical studies posit that subscribers ‘flip’ in IPOs immediately on the listing day to capture instantaneous profits. Consistent with this hypothesis, we find that both curves of the market listing day of IPOs are significantly negatively sloped with the supply curve being much steeper and above the demand curve. The excess demand that occurs during the subscription period becomes excess supply once the shares start to float on the listing day. Overall, we establish a strong empirical link between the underpricing puzzle and the aftermarket interaction of IPOs.

Induced Innovation, Endogenous Technical Change and Income Distribution in a Labor‐Constrained Model of Classical Growth

AbstractWe present a steady state analysis of a labor‐constrained classical growth model with endogenous direction and intensity of technical change. Firms use retained profits to raise their productive capacity and to improve labor and capital productivities. Investments are planned to maximize instantaneous profits. Comparative dynamics exercises show that (1) an increase in the saving rate and in R&D subsidies raises the steady state labor share, labor productivity growth and the employment rate, and (2) a rise in workers' bargaining power reduces the employment rate while leaving productivity growth and distribution unaffected.

IPO Underpricing in a Simultaneous Equations Model of Supply and Demand: Evidence from a Market of Retailers

This paper fulfills a great need for empirical evidence on the impacts of the supply, demand and allocation of shares on the underpricing of initial public offerings (IPOs). Exploiting a unique dataset and the institutional framework of Saudi Arabian IPOs, we construct a simultaneous equations model of supply and demand. Our evidence indicates that both curves of the market listing day supply and demand of IPOs are significantly negatively sloped with the supply curve being much steeper and above the demand curve. This is consistent with the idea that subscribers “flip” in IPOs immediately on the listing day to capture instantaneous profits. The excess demand that occurs during the subscription period becomes excess supply once the shares start floating on the listing day. Our study is the first move towards addressing the underpricing puzzle in a supply and demand context.

CAPM with View Bias Adjustment Under Imperfect Information

In this paper, we extend the traditional CAPM theory by introducing a new concept of risk-reward measurement based on view bias adjustment under imperfect information. Within that general framework, people might only know the possible results of an uncertainty, they do not know the exact probabilities of each state, but just have a vague assessment. Consequently they are not view neutral anymore, but have either pessimistic or optimistic view bias. The main conclusion is that the generalized expectation of the excess rate of return can still be described in a single beta representation, except that the systematic risk is now the weighted average of exposed risk and potential risk. Meanwhile imperfect information can induce instantaneous profit by repackaging portfolios, and we name it information premium. Empirical study indicates that this new concept can help to explain the equity premium puzzle in a way that people have pessimistic view bias, when there is no perfect information in the postwar US, and it explains the momentum by the fact that view bias reciprocates from pessimism to optimism, and it might be a mean reversion process. Further more, since there is no existing econometrics method to test VCAPM (view bias based CAPM), we develop VOLS (we make this name in accordance with the mathematical model VCAPM), including resetting the assumptions, looking for new estimators, developing the appropriate asymptotic tools to do hypothesis test. At last, we try to use GMM integrated with VOLS method to do VCAPM empirical analysis. That would be another contribution of this research.

Generic and Brand Advertising Strategies in a Dynamic Duopoly

To increase the sales of their products through advertising, firms must integrate their brand-advertising strategy for capturing market share from competitors and their generic-advertising strategy for increasing primary demand for the category. This paper examines whether, when, and how much brand advertising versus generic advertising should be done. Using differential game theory, optimal advertising decisions are obtained for a dynamic duopoly with symmetric or asymmetric competitors. We show how advertising depends on the cost and effectiveness of each type of advertising for each firm, the allocation of market expansion benefits, and the profit margins determined endogenously from price competition. We find that generic advertising is proportionally more important in the short term and that there are free-riding effects leading to suboptimal industry expenditure on generic advertising that worsen as firms become more symmetric. Due to free-riding by the weaker firm, its instantaneous profit and market share can actually be higher. The effectiveness of generic advertising and the allocation of its benefits, however, have little effect on the long-run market shares, which are determined by brand-advertising effectiveness. Extensions of the model show that market potential saturation leads to a decline in generic advertising over time.

On the multiplicity of efficiency-inducing tax rules

We derive corrective tax rules for a monopoly whose production processes generate emissions that add to a stock of pollution which evolves over time. In our model, the monopolist maximizes the discounted sum of its instantaneous profits, and the government designs a tax rule that corrects for both the externalities associated with pollution and the market power of the monopolist. We show that there exists a continuum of time-independent tax rules that guide the monopolist to achieve the socially optimum production path.

Exchange Rate Shocks and the Speed of Trade Price Adjustment

1. Introduction Theoretical and empirical work in the international trade literature dealing with the relationship between exchange rate and trade prices has been dominated and guided by the static pass-through and profit markup model' (see, e.g., Feinberg 1986; Mann 1986; Fisher 1989; Hooper and Mann 1989; Knetter 1989; Gagnon and Knetter 1995; Feenstra, Gagnon, and Knetter 1996; and Lee 1997). The shortcoming of such models is well captured by William Branson (1989, p. 333): Difference in adjustment response signals to me the need for a reconsideration of the theoretical framework for the analysis of the pass-through question. By now, we should be thinking about optimizing price policy for investors and exporters who know that they face an exchange rate that follows some sort of stochastic process over time. These differences call for a revision of pass-through theory along the lines of time series analysis. Our explicit incorporation of profit-maximizing firms facing adjustment costs develops the model introduced by Krugman ( 1987). It transforms the traditional markup and pass-through model to explain from first principles a dynamic markup and a price adjustment speed, both depending on fundamental characteristics of the firms involved. Krugman (1989) concludes his paper on pricing to market by calling for further research on the adjustment cost model. Regarding the adjustment cost approach, he states (Krugman 1989, p. 44), It is still a speculative idea, not grounded in solid empirical tests; but it is a good story, and if it is correct, it has extremely important implications for economic policy. The present paper provides the quantity adjustment cost approach that Krugman calls for. As such, it complements the work of Gagnon (1989) and Kasa (1992). While Gagnon and Kasa employ quantity adjustment cost models with many of the same features as the model developed here, they provide only approximate solutions and focus on a quite different set of issues. Gagnon examines the effect of exchange rate variability on trade volume. Kasa investigates the importance of mean reversion in exchange rates as an explanation for the pricing to market hypothesis. In contrast, our focus is on the relation between adjustment speeds and pass-through. Thus, our contribution relative to Gagnon (1989) and Kasa (1992) is that we provide the passthrough issue in a dynamic context with exact analytical solutions that relate the degree of passthrough to adjustment speeds and identify the determinants of commodity-specific adjustment speeds in response to exchange rate shocks. The remainder of the paper is organized as follows. In section 2 we develop a partial equilibrium model, taking exchange rates as given, of the pricing policies of a profit-maximizing firm competing in foreign markets and subject to a convex quantity adjustment cost. Section 3 develops testable implications directly from the model. Section 4 discusses the data and empirical methodology for preliminary two-stage time-series and cross-sectional tests. Section 5 provides the tentative estimation, and section 6 concludes. 2. A Simple Partial Equilibrium Model Consider a representative firm producing fox export that maximizes the expected discounted value of infinite horizon real profits. The firm generates its revenue abroad in foreign currency. It has no influence on the exchange rate, may adjust its price at any point in time, but is subject to a convex cost of quantity adjustment. The firm maximizes where x is the exogenously given real exchange rate at time t. We define x as the units of domestic currency per unit of foreign currency multiplied by the export destination country's price index and divided by the home country's price index. Instantaneous profits are discounted at a rate r, which is specific to the firm; this rate accounts for a standard risk premium inherent in the riskiness of the firm's activities. …

Optimal consumption-wealth relationships derived by consumer intertemporal profit maximisation

This paper proposes an artificial intertemporal consumer profit-maximisation problem that is simple to solve. The optimal consumption function, which is consistent with intertemporal utility maximisation, is then generated directly from a specification of the consumer's instantaneous profit function.

On the saddle-point stability for a class of dynamic games

In this paper, we study the stability properties of the class of capital accumulation games introduced by Fershtman and Muller (Ref. 1). Both discrete and continuous time versions are discussed. It is shown that the open-loop Nash equilibrium solutions for both games are characterized by a general saddle-point property, a result best known from the turnpike literature in optimal growth theory. In the case of zero discount rates, an even stronger result can be derived: As long as the Hessian matrix of the instantaneous profit functions has a quasidominant diagonal, no pure imaginary roots are possible.

Abatement of Pollution in Models with Stochastic Penalties

Suppose a competitive firm pollutes. In the absence of regulation, the firm's instantaneous profit function is 7r(q) = pq Co where q is output, p is price, is variable cost, and Co is fixed cost. Assume V(0) = 0 and V(q) > 0. The latter condition implies iT(q) C3, and vice versa. The firm will not pay $1,000 for compliance to avoid a $10 fine. Conversely, the firm is better off to pay $1,000 for compliance than to be fined $2,000. In either case, the firm does not change its output. The effect of a fixed fine on abatement is not continuous except trivially. Either there is no effect, or there is a jump from the original level of abatement if the firm complies. Suppose instead of a fixed fine, there is a fine of y dollars per unit of output. Then under non-compliance the profit function is T (q) y q, and maximum profit under non-