Minimum Profit Constraint Research Articles

Contract vs. recruitment: Integrating an informal waste merchant to a formal collector for collection of municipal solid waste

Due to environmental and social issues caused by unauthorized processing of recyclables, waste merchants, key informal collectors with the door-step collection in China have been integrated into formal collectors. However, how to achieve effective integration is still underexamined. This study puts forward two strategies for integrating a waste merchant from a formal collector’s perspective, namely, contract strategy (CS) and recruitment strategy (RS). A leader-follower game model is developed to explore and compare the suggested integration strategies considering the minimum profit constraint of a waste merchant. On this basis, the feasible boundary for the selection of a reasonable strategy by the formal collector is identified. The results show that the formal collector remains reluctant to integrate the waste merchant through RS or CS if the created value by the recyclables is low. The likelihood of selecting RS increases with the higher reclaimed value. Reduced hassle costs for residents can expand the boundary of selection for RS. Besides, it is observed that CS has a greater chance when the ratio of the collection cost coefficient under RS to CS increases. In particular situations, the formal collector may gain a higher profit using RS, although it may not definitely result in higher collection quantity compared to the situations where CS is applied. Overall, this study provides insights for formal collectors for the selection of an effective integration strategy.

The Lerner index and revenue maximization

ABSTRACTBased on profit-maximizing behaviour, the usual interpretation of the Lerner index is that a zero value reflects competitive behaviour, while a positive value is associated with market power. We investigate to what extent the usual interpretation of the Lerner index remains valid in a setting where firms do not pursue profit maximization, but instead maximize revenues subject to a minimum-profit constraint. We show that a positive Lerner index still indicates market power, but that the magnitude of a positive Lerner index can no longer be used to determine how much market power there is. Furthermore, extra information would be required to draw conclusions about the presence or absence of market power when the Lerner index is zero or negative. We discuss the empirical implications of our results.

Tuition Sensitivity in Online Education

The paper presents a price discrimination model of a university operating in two markets, online and traditional education, and attempting to maximize revenue under a minimum profit constraint. Optimality conditions, based on demand elasticities are derived. Using a dataset of 398 southeastern public two and four year higher education institutions we estimate the price elasticity of demand for both online and traditional education. Utilizing a panel framework, we find that online education (e-learning) is highly price elastic and traditional education is price inelastic. Comparison of the empirical elasticities with the model predictions indicates that universities do not behave optimally. Reduction of online tuition and increases in traditional tuition are required to move universities towards the goal of revenue maximization.

What If Marketers Put Customers Ahead of Profits?

We examine a duopoly where one of the firms does not maximize profit, but instead maximizes consumer surplus subject to a minimum profit constraint. Competition between the firms is modeled as a two-stage game, which is solved by backward induction. In the first stage, firms choose product quality levels sequentially, anticipating (simultaneous move) Bertrand price competition in the second stage of the game. The identity of the first moving firm is taken as exogenous, and thus we separately consider the cases of a surplus-maximizing and a profitmaximizing first mover. We consider both cases of convex fixed costs and convex variable costs of producing quality. Our primary goal in conducting the analysis is to evaluate changes in key market outcomes as the surplus-maximizing firm becomes more altruistic in its orientation, as measured by the extent to which it sacrifices profits. As a limiting case, our framework considers competition between a profit-maximizing firm and a non-profit firm. Interim cases may be viewed as models of competition involving a form of “social enterprise,” i.e., a firm organized as a for-profit entity but whose primary objective is to advance consumer welfare. From the analysis, we conclude that the surplus-maximizing firm can deliver significant additional value to consumers by forgoing some of the profit it would have earned as a profit maximizer. However, the effectiveness of this strategy depends upon the cost structure of the industry and which firm is the first mover. With fixed costs of quality, there is a significant first mover advantage. When the surplus-maximizing firm moves first, the tradeoff between sacrificing profits and generating consumer surplus is quite favorable, with surplus approaching its fully efficient level as the surplus-maximizing firm approaches being a non-profit. With variable costs of quality, higher levels of consumer surplus are achieved when the surplus-maximizing firm is the follower in quality choice, although differences in outcomes diminish as the surplus-maximizing firm sacrifices more profit. A key implication of these results is that in order to achieve highly favorable outcomes, the surplus-maximizing firm must move first when production costs are fixed, whereas the order of quality moves is less restrictive when costs are variable.

Risk-averse profit-based optimal scheduling of a hydro-chain in the day-ahead electricity market

Abstract This paper presents a profit-based model for short-term hydro scheduling adapted to pool-based electricity markets. The objective is to determine a feasible and realistic operation of a set of coupled hydro units belonging to a small or medium-size hydroelectric company in order to build the generation bids for the next 24 hourly periods. The company is assumed to be price-taker, and therefore, market prices are considered exogenous variables and modeled via scenarios generated by an Input/Output Hidden Markov Model (IOHMM). In order to be protected against low prices scenarios, two different risk-aversion criteria are introduced in the model: a minimum profit constraint and a minimum conditional Value-at-Risk (CVaR) requirement, which can be formulated linearly in the context of the optimization problem. In order to ensure a feasible operation, the model takes into account a very detailed representation of the generating units, which includes forbidden discharge intervals, spatial–temporal constraints among cascaded reservoirs, etc. The non-linear relationship among the electrical power, the net-head and the turbine water discharge is treated by means of an under-relaxed iterative procedure where net-heads are successively update until convergence is reached. During each algorithm stage, previous iterations’ information is used to build the input–output curves. This way, the hydro scheduling problem can be formulated as a MILP optimization problem, where unit-commitment decisions are modeled by means of binary variables. The model has been successfully applied to a real-size example case, which is also presented in this paper.

Alfred D. Chandler Jr., 1918–2007

15 SEPTEMBER 1918 * 9 MAY 2007 TO A STUDENT of the modern corporation with an interest in (which includes but goes beyond the corporate governance concerns posed by the separation of ownership and control), Alfred D. Chandler's book Strategy and Structure (1966) came as a bombshell. My dissertation, Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm (1963; published in 1964 with the same title), which had been inspired in part by William Baumol 's famous sales maximization hypothesis (1959), summarizes the literature on the modern corporation and sketches the research agenda that I then had in mind. That agenda underwent a major change after I read Chandler. Prior to my reading of Chandler, the need for the firm to observe a minimum profit constraint, together with competition in the product and capital markets, was the main control over managerial discretion that I had taken into account. Since many of the large firms that were of interest to Chandler (and to me) were operating in oligopolistic industries that afforded the firms with an appreciable degree of relief from product market competition, and since competition in the capital market (mainly proxy contests, since takeover by tender offer had yet to be perfected) was weak, it was my judgment (and that of many others) that large U.S. corporations typically enjoyed considerable latitude (sometimes referred to as slack). Strategy and Structure introduced a new control instrument: managerial discretion also varied with the structure of the firm. This was a revolutionary concept, and I was reluctant to embrace it. Could it be that management was both the problem and the solution? This possibility certainly had to be entertained if, contrary to received microtheory, organization form mattered. The first step, which I had already taken, was to recognize that managerial discretion was problematic. The second step was to confront the latent lesson of Strategy and Structure: If organization form was a decision variable, then provision for that should thereafter be made in the theory of the modern corporation.1 As described and explained by Chandler, the multidivisional form was an organizational innovation (as devised by Alfred P. Sloan Jr., Donaldson Brown, Pierre du Pont, and others) that often served as a more effective check on managerial discretion than the earlier unitary (U-form) form of organization. Compared with the (U-form), in which strategic and operating decisions were joined, the multidivisional (M-form) structure worked out of a logic of organization in which operating and strategic decisions were separated (the logic being akin to that set out by W Ross Ashby in his 1960 book, Design for a Brain). The resulting decentralized structure was one in which the top management (the general office, as Chandler described it) had been removed from operating involvements and had been made responsible for strategic decision making and resource allocation within the firm, and the operating parts were organized as a series of quasi-autonomous divisions, each of which could be held accountable for its own net receipts. …

TAXES AND CORPORATE CHARITY: EMPIRICAL EVIDENCE FROM MICROLEVEL PANEL DATA

* Abstract - This paper explores the relation between corporate contribu- tions and tax rates to examine whether corporate philanthropy is motivated by profit maximization or managers' utility maximization, the two basic models of corporate giving that exist in the literature. No relation between contri- butions and tax rate is consistent with profit maximization, whereas either a positive or negative relation is consistent with investment in contributions beyond the profit-maximizing level. The empirical analysis is based on firm- specific longitudinal data on contribu- tions and estimated marginal tax rates for a five-year period spanning the Tax Reform Act of 1986 (TRA86). The results are consistent with managers' utility maximization being an important motive for corporate contributions, but contributions beyond the profit- maximizing level are limited by a binding minimum profit constraint. In addition, the results indicate that the income elasticity of corporate contribu- tions is low, ranging from 0.04 to 0.17 depending on how income is defined. These estimates are much lower than reported previously with aggregated data and firm-specific cross-sectional data.

Economics and business, the theory of the firm revisited: a Scottish perspective

Examines the gap between the microeconomic theory of the firm and business reality. In particular, it seeks to redress the balance between theory and practice by examining the objectives of top Scottish companies. The survey confirms initial expectations that Scottish companies are more owner‐controlled than their UK counterparts. In addition, it also appears that Scottish companies are more likely to pursue profit maximization as a goal than companies elsewhere in the UK. It was found that the majority of Scottish companies were financially conservative and risk‐averse but in the absence of comparable data for UK no conclusions can be drawn from this. Nevertheless, in common with other studies, it is confirmed that Scottish companies are similar to their UK counterparts in so far as they tend to be satisficers and pursue multiple objectives. There appears to be no evidence to support links between size and ownership type and profit maximization. Contrary to expectations, owner‐controlled companies are more likely to operate with a minimum profit constraint than managerially controlled companies. Finally, it is confirmed that the majority of firms are “full‐cost pricers” although hypotheses linking this type of pricing policy with size and market structure, while suggestive of such links, were not statistically significant.

An Empirical Analysis of Ramsey Pricing in Japanese Electric Utilities

In this study an empirical analysis of Ramsey pricing in Japanese electric utilities based on the estimation results of electricity cost and demand functions was conducted. The Ramsey pricing rule, which describes the set of uniform prices maximizing the sum of producer and consumer surplus subject to the minimum profit constraint, can be directly applicable to the rate regulation of electric utilities facing intermodal competition where they should serve both competitive and noncompetitive markets. Flexible functional forms such as translog and almost ideal demand systems are employed to obtain estimates necessary for a statistical test of the Ramsey pricing rule. The test result rejects the hypothesis that the rate regulation satisfies the Ramsey optimal criteria, and the movement from actual to Ramsey optimal prices may require a substantial increase in residential electricity price and a slight decrease in industrial electricity price. J. Japan. Int. Econ., September 1993, 7 (3), pp. 256–276. Central Research Institute of Electric Power Industry, 1-6-1 Chiyodaku, Tokyo 100, Japan; Senshu University, 2-1-1 Higashimita, Tama-ku, Kawasakishi, Kanangawaken 214, Japan; and University of Tsukuba, Tsukubashi, Ibaragiken 305, Japan.

Organization and economic behavior: An interpretation of recent findings

Institutionalist theorists have long suggested that market power creates managerial discretion to diverge from competitive norms — for good or for bad [Spechler, 1978]. Where differences appear among them on how to conceptualize the objective, Baumol [1967] and Eichner [1976] have argued for growth maximization (subject to a minimum profit constraint), while Galbraith [1973] and the Carnegie “school” [see Cyert, March, 1963] have preferred an indeterminate combination of security, growth, prestige, and so forth.

Revenue vs. Profit Maximization: Differences in Behavior by the Type of Control and by Market Power

Contrary to what the neoclassical theory of the firm teaches, Professor Baumol suggested [3, 187] the typical large corporation in the United States seeks to maximize not its profits but its total revenues which the businessman calls his sales . . . subject to a minimum profit constraint. This hypothesis was based on Baumol's rather spotty observation of business behavior. The purpose of this study is to test empirically the revenue maximization (RM) Hypothesis. At the outset, it must be emphasized that we do not expect to find RM among all firms; nor did Baumol claim such generality. More specifically, the RM hypothesis pertains primarily to large firms falling into two classifications:

Input Demand Functions for the Profit-Constrained Sales-Maximizer: Income Effects in the Theory of the Firm

Several recent papers (Bear [4], Ferguson [6], Russell [11], Winch [16]) have elaborated upon the accepted analysis of the profit-maximizing firm's demand for inputs (as presented, e.g., in Hicks [8, ch. 7] and Samuelson [12, ch. 4]).2 As one might expect in such a wellexplored field, possible cases have drawn a good deal of attention: when could the demand for an input increase with an increase in its price, or decrease as the firm's output increases (with constant input prices)? Both perfect and imperfect competition in the output market have been considered. After tying up a few loose ends in the theory of the profit-maximizer, this paper extends the analysis to the case of the firm which maximizes sales subject to a minimum-profit constraint. The price-output behaviour of such a firm is familiar from Baumol's work [1, chs. 6 and 7], [2, ch. 13], upon which have followed various models using similar (but usually more general) objective functions, discussing both comparative statics and growth (e.g. [15], [14]). How such a firm would vary its input mix as input prices and output vary seems to have been neglected in this literature, however; so a detailed comparative-statics analysis may be worthwhile. Moreover, we do find interesting differences between the behaviour of the profit-maximizer and that of the profit-constrained sales-maximizer, the most important of which is the appearance of an income effect and the possibility of Giffen inputs, in precise analogy with the theory of consumer behaviour. As a result, the perverse case in the standard theory, while remaining rather odd, now fits into a familiar context; and the relationship between consumer and producer theory appears in a new, perhaps slightly more illuminating light. Finally, we derive relationships between the profit-maximizer's and sales-maximizer's elasticities of demand for inputs. When the present author came upon the results discussed below (in a quite different context-see [10]), he immediately turned to the Foundations and Value and Capital. But Hicks wrote, for example: ... In the case of production, we do not have anything similar to the

An Empirical Test of the Sales Maximization Hypothesis

William J. Baumol has denied that profit maximization is the dominant objective of leaders of large businesses. (1, pp. 31-2, 46-8, 52). He has stated that the primary goal of leaders of large corporations is revenue maximization and that increased sales will always be pursued, even at the expense of lower profits, in both the shortrun and the long-run (1, p. 52). In the Baumol model total sales are viewed as a function of output and prices in the short-run and of output, prices, and advertising in the long-run. In the short-run, with a given demand curve, output will be expanded as prices fall beyond the point of maximum profit until total revenue is either a maximum or, if total revenue is still increasing, until the minimum profit constraint is reached (1, p. 55). Sandmeyer has derived from the Baumol model a comparative statics model showing a long-run total sales curve that is determined from the variables, price and advertising (6, pp. 1078-80) and in which is incorporated induced increases in demand through advertising outlays. (See Figure 1.) Each point along the total sales curve represents a point of maximum total revenue, given the demand curve associated with a specific level of advertising. As in the short-run, sales are expanded beyond the point of maximum profit, but the eventual decline of profits to the minimum profit constraint-resulting from a rate of increase in sales less than the rate of increase in costs-sets the limit to sales expansion. In the comparative statics model, it is assumed that sales can be expanded monotonically through increased advertising outlays.' The variations in advertising outlays depend in part upon the level of the minimum profit constraint, the structure of costs, and exogenous forces determining demand. The first two determine the amount of excess funds available for advertising and the third determines the endogenous influence of advertising on demand. If the Baumol hypothesis is to have empirical significance, there must be revealed in the objective behavior of large firms a marked tendency to expand sales in the absence of expanding profits. Yet, the Baumol model depicts different relationships between sales and profits at different levels of advertising outlays. In Figure 1 sales and profits vary directly up to OA, in the vicinity of OA,, sales and profits show little correlation; and beyond OA,; profits and sales vary inversely, all variations occurring as advertising outlays expand. In order to permit the establishment of less ambiguous relationships among the variables, the

On Sales-Maximising and Oligopoly Behaviour

Among recent and continuing attempts to solve the oligopoly problem -that is, to provide a determinate model of oligopoly behaviour which can be meaningfully related both to the traditional theory of the firm and to general theory of market determination of price and output-one of the most promising has been Professor Baumol's theory of oligopoly .2 This approach is based on the hypothesis that oligopolist firms maximise their total dollar sales rather than their total profits, subject to a minimum profit constraint. His theoretical analysis of the behaviour of firms motivated in this way enables Baumol to derive some interesting conclusions about multiproduct firms, advertising and service competition, and the influence of overhead costs upon output. In addition he derives the general conclusion that, by maximising sales rather than profits, oligopolists' price-output decisions will conform to welfare criteria of efficient allocation more closely than is commonly thought. One hesitates to raise questions about so fruitful an analysis as this, especially since, as Baumol points out, it seems to fit and explain some important problems of business motivation and behaviour which the orthodox theory of the firm has never been able to handle satisfactorily. Baumol's most recent presentation of this approach minimises its claims to explain oligopoly behaviour.3 But it needs to be explicitly stated that this approach gives only a specialised theory of the salesmaximising firm rather than a general theory of oligopoly . This article is intended simply to dispel any lingering notion that salesmaximisation can explain the behaviour of the firn in conditions of oligopoly as this term is customarily defined, that is, where interdependence in decision-making is present in a group of rival firms.