Profit-maximizing Firms Research Articles

Global economic impact of weather variability on the rich and the poor

AbstractTemperature and precipitation variability and extremes impact production globally. These production disruptions will change with future warming, impacting consumers locally as well as remotely through supply chains. Due to a potentially nonlinear economic response, trade impacts are difficult to quantify; empirical assessments rather focus on the direct inequality impacts of weather extremes. Here, simulating global economic interactions of profit-maximizing firms and utility-optimizing consumers, we assess risks to consumption resulting from weather-induced production disruptions along supply chains. Across countries, risks are highest for middle-income countries due to unfavourable trade dependence and seasonal climate exposure. We also find that risks increase in most countries under future climate change. Global warming increases consumer risks locally and through supply chains. However, high-income consumers face the greatest risk increase. Overall, risks are heterogeneous regarding income within and between countries, such that targeted local and global resilience building may reduce them.

Oligopoly competition between satellite constellations will reduce economic welfare from orbit use

Orbital space enables many essential services, such as weather forecasting, global communication, navigation, Earth observation for environmental and agricultural management, and national security applications. Orbit use is increasingly defined by firms launching coordinated fleets-"constellations"-of satellites into low-Earth orbit. These firms operate in markets with few or no competitors, such as the market for broadband internet provision to rural areas. How will oligopolistic competition shape the allocation of orbital space? We analyze orbital-use patterns and economic welfare when two profit-maximizing firms operate satellite constellations with sophisticated collision avoidance systems. We compare this duopoly equilibrium to public utility constellations designed and regulated to maximize economic welfare from orbit use. We show that imperfect competition reduces economic welfare from orbit use by up to 12%-$1.1 billion USD-per year and distorts the allocation of orbital space. The nature of the distortion depends on the magnitude of constellation-related environmental damages. When damages are low, economic welfare is maximized by larger-than-equilibrium constellations. When damages are high, economic welfare is maximized by smaller-than-equilibrium constellations. Between the growing commercial and national interests in outer space and the importance of low-Earth orbit to space exploration, orbit-use management is likely to be a fruitful and policy-relevant area for economic research. We conclude with a discussion of future research directions in orbit-use management relevant to policymakers around the world.

Dynamic behavior in a Cournot duopoly with social responsibility

In an oligopoly with isoelastic demand, the paper analyzes the quantity competition between NPM profit-maximizing firms and NRS socially responsible firms whose objective function is a linear combination of profit and consumer surplus.From the static analysis it follows that greater social responsibility has a competitive effect, since reduces the equilibrium price and increases the market share of socially responsible firms. In addition, it increases both the consumer surplus and total surplus.For the duopoly case, the dynamic study leads to the conclusion that, if at least one of the firms follows the gradient rule as an adjustment mechanism, an increase in the speed of adjustment is a source of instability. An increase in the value of the elasticity of demand as well as a reduction in the marginal cost has a stabilizing effect on the Cournot equilibrium. A higher level of social responsibility exerts a stabilizing role on the dynamics as long as demand is sufficiently elastic.

Stochastic equilibria with capacity expansion: Increasing expected profit with risk aversion

Profit-maximizing firms hedge risk from uncertainty by deciding on capacity investment and production. Typically, risk-averse firms monotonically forgo expected profit in exchange for an improved risk measure, e.g., conditional value-at-risk (CVaR). However, the stochastic-equilibrium literature exhibits non-monotonicities, i.e., both CVaR and expected profit increase with risk aversion. We prove that this result arises because oligopolistic firms account for the price impacts of their own decisions but ignore those of other firms. Consequently, firms reduce capacity “too much” with risk aversion.

Strictly regulated cannabis retail models with state control can provide lessons in how jurisdictions can regulate THC.

Strictly regulated cannabis retail models with state control can provide lessons in how jurisdictions can regulate THC.

Diversification strategy and firm technical efficiency in Moroccan real estate sector: A Data envelopment analysis application

This research paper provides an additional empirical evidence by exploring the link between the diversification and economic performance. Diversification is a form of business strategy that aims to improve the profitability of the company by increasing the volume of sales thanks to the multiplication of products and services, and the conquest of new markets both locally and internationally. This paper aims to fill in the gap and investigate the relationship between business diversification and economic performance in the context of real estate businesses in Morocco. Economic performance has been approached from the perspective of the firm's resources, in particular its production function, represented by the variables of inventory and personnel costs. The sampling includes 60 firms in the real estate sector for the fiscal year of 2019/2020. A quantitative research method is used to measure the link between the diversification strategy and economic performance. The results show that diversification has important implications to drive profit-maximizing firms and advocate the economies of scale and scope. In addition, the findings reveal that growth contributes to scale and scope economies, but at the same time it can lead to diseconomies, when further impetus to economic integration and the increasing complexity of diversification no longer generate profit. The analysis of DEA scores reveal that on average, companies are underperforming with a score of technical efficiency not exceeding 41%; however their score of scale efficiency is pretty good with 85%; that is, most companies are operating at increasing return to scale. Keywords: Real Estate, Diversification, Morocco, DEA.

Estimating market power under a nonparametric analysis: evidence from the Chinese real estate sector

The traditional Lerner index is limited in its capacity to estimate the level of competition in the economic sector from the perspective that it mainly focuses on the overall level of market power for each individual decision-making unit. Recently, Fukuyama and Tan (J Oper Res Soc, 73:445–453, 2022) estimated the Lerner index by applying the nonparametric data envelopment analysis (DEA) to calculate the marginal cost, which is an important component in the estimation of the Lerner index. Our study further extends the study of Fukuyama and Tan (J Oper Res Soc, 73:445–453, 2022) by estimating the marginal cost under the DEA in a multi-product setting. Our proposed methodology benefits from the ability to find positive marginal costs for all the products and specifies all decision-making units are profit maximizers. In order to achieve this, the marginal cost is estimated by referring to the nearest point on the best practice cost-efficient frontier for the profit-maximizing firms. We then apply our innovative method to the Chinese real estate industry. The result shows that the Chinese real estate industry has higher market power in the residential commodity housing market than that in the commodity housing market. This is also the case for different geographical areas in China. Overall, for both of these two different markets, the level of market power experiences a level of volatility.

Health risk and the welfare effects of Social Security

AbstractWe quantify the importance of idiosyncratic health risk in a calibrated general equilibrium model of Social Security. We construct an overlapping generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the US economy and perform two computational experiments: $\left (i\right)$ cutting Social Security’s payroll tax, and $\left (ii\right)$ modifying Social Security’s benefit-earnings rule. Our findings suggest that health risk amplifies the welfare implications of both experiments: downsizing Social Security always leads to higher overall welfare, but the welfare gain is larger when we account for health risk, and increasing the progressivity of Social Security’s benefit-earnings rule has a larger positive effect on welfare in the presence of health risk. We also find that allowing households additional tools to self-insure against health risk weakens the precautionary motive, so our experiments have similar welfare implications both with and without health risk.

Case Article—GAP: A Humanitarian Initiative of Ramakrishna Mission for Underprivileged Children

Conventional textbook models of profit-maximizing firms are generally unsuitable for understanding and modeling the objectives of a nonprofit organization. Closing this gap is especially important as nonprofits, regarded as the third pillar of the society, are increasingly prevalent along with the government and the for-profit businesses. GAP, a humanitarian project undertaken by Ramakrishna Mission (RKM), a large nonprofit organization in India, has been highlighted in our case. Our case serves three pedagogical objectives: (i) understanding the cost structure that is specific to the GAP project, (ii) applying break-even analysis, and (iii) quantitative modeling of the nonprofit’s decision-making problem using a simple spreadsheet modeling approach. The case has been tested across a diverse set of courses across different MBA programs at two public business schools in India. In all those courses, students found the case challenging but were appreciative of the hands-on experience gained by working on a real-life decision-making problem.

The supply-side effects of cannabis legalization

ObjectiveThe purpose of this study is to examine how cannabis legalization and corresponding taxation would affect the supply-side of the cannabis market. Specifically, the study considers various scenarios in which Oklahoma legalizes recreational cannabis for adult use and simulates changes in state-level market sales for other legal states and the average grower profits in Oklahoma. We assume that legalizing recreational cannabis in medical-only states would significantly increase the demand quantity in the legalized states and the local government would levy a significant level of tax on recreational cannabis. These assumptions are based on the post-legalization phenomena in other legalized US states.MethodWe simulate outcomes in the cannabis industry under the assumption of representative consumers with constant elasticity of substitution demand behavior and profit-maximizing firms with a Cobb-Douglas profit function. All agents are assumed to take exogenous prices as given. We calibrate the model using state-level sales data from 2020 and explore potential policies in Oklahoma and at the federal level.ResultsWe find that, under the scenarios we consider, legalization of recreational cannabis in Oklahoma would lead to a decrease in the quantity of cannabis sold in Oklahoma’s medical cannabis market as well as decreases in the quantity of cannabis sold in other states on average. Furthermore, we find that as the excise tax rate on recreational cannabis in Oklahoma is increased, the demand quantity in recreational cannabis market would decrease while the other markets’ demand quantity would increase on average. As the elasticity of substitution between state-level products increases, the overall demand quantity would increase and the market quantity across states become more sensitive to Oklahoma’s tax policies. This pattern could become starker as the elasticity of substitution between recreational and medical cannabis increases. In terms of profit, heavy taxation and price decrease due to legalization would significantly decrease cannabis producers’ production and profit levels unless the cost reduction strategies complement legalization.ConclusionBased on our results, the legalization of recreational cannabis has the potential to generate tax revenue to fund critical government projects and services. However, such legalization would have to be done carefully because heavy excise taxes would decrease the legal cannabis market demand and growers’ profit, which would incentivize producers and consumers to move to the illicit cannabis market. Policymakers would have to compromise between the levels of interstate transportation and taxation to ensure that cannabis suppliers also realize some profit within the cannabis supply chain.

Negative Advertising and Competitive Positioning

Negative advertising provides information about the weaknesses of a competitor’s product. We study negative advertising with a focus on how its regulation impacts product positioning for profit-maximizing firms. We build a model of informative advertising competition, where product positioning is endogenous, and consumers have rational expectations. We show that despite the informational benefits of negative advertising, permitting it (as the Federal Trade Commission in the United States does) may lead to reduced product differentiation and lower consumer welfare, even in markets where firms do not use negative advertising in equilibrium. We then extend our model to political competition, where a candidate’s objective is to obtain a larger share of votes than the competitor. We show that political competition supports higher positional differentiation, along with more negative advertising than product competition, in line with observed high use of negative advertising in political races and their rarer use in product competition. This paper was accepted by Dmitri Kuksov, marketing. Funding: P. Yildirim thanks Mack Institute and the Dean’s Research Funds of the Wharton School for their generous funding of this study. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4439 .

Public Good

Public good, in economics, a product or service that is non-excludable and nondepletable. A good is non-excludable if one cannot exclude individuals from enjoying its benefits when the good is provided. A good is nondepletable if one individual’s enjoyment of the good does not diminish the amount of the good available to others. For example, clean air is (for all practical purposes) a public good, because its use by one individual does not (for all practical purposes) deplete the stock available to other individuals, and there is no way to exclude an individual from consuming it, if it exists. Another common example is national defense, because it is assumed that a nation-state cannot choose to protect just some of its residents from foreign aggression while excluding others from that protection; so too, providing one resident with national defense does not diminish the protection being provided to other residents. A public bad is similarly defined to be a “bad” that is non-excludable and nondepletable. For example, polluted air is a public bad, for the same reasons that clean air is a public good.Public goods contrast with private goods, which are both excludable and depletable. Food is a straightforward example of a private good: one person’s consumption of a piece of food deprives others of consuming it (hence, it is depletable), and it is possible to exclude some individuals from consuming it (by assigning enforceable private property rights to food items, for example).Some goods fit neatly into neither category, because they are excludable but nondepletable (such as a music concert) or are non-excludable but depletable (such as a public beach, which may become less attractive, or “depleted,” as more individuals make use of it).Public goods (and bads) are textbook examples of goods that the market typically undersupplies (or oversupplies in the case of public bads).For example, profit-maximizing firms and self-interested individuals can be expected to choose levels of production and consumption such that the aggregate level of pollution resulting from their activities leaves everyone worse off (according to their own preferences) than if each were somehow prevented from producing or consuming as much as is individually optimal. Commonly suggested solutions to such “market failures” include taxes and subsidies or government intervention.An important similarity exists between problems involving the provision of public goods and collective action problems such as voting, public protest, or output restriction in the case of oligopolists where an individual typically cannot be prevented from benefiting from the achievement of the goal of the collective action, if it is achieved. In such cases, the achievement of the goal can be thought of as a non-excludable good. Consequently, it is often thought that individuals may have little incentive to contribute to its achievement by turning out to vote or participating in a protest if they view the act of contribution as in itself costly and unlikely to have a significant impact on whether the collective goal is achieved. Keywords: Clean-Air- Defence-Lighthouses-public park-Streetlamps-public-service-public-transport. DOI: 10.7176/RHSS/12-11-04 Publication date: June 30 th 2022

WAGE-RISE CONTRACT AND MIXED COURNOT DUOPOLY COMPETITION WITH PROFIT-MAXIMIZING AND SOCIALLY CONCERNED FIRMS

This paper investigates a Cournot game model with a nonlinear demand function where a profit-maximizing firm competes against a socially concerned firm. The timing of the game is as follows. In stage one, each firm non-cooperatively decides whether to offer a wage-rise contract policy (WRCP) as a strategic commitment device. In stage two, after observing the rival’s decision in stage one, each firm non-cooperatively chooses its actual output. This paper presents the equilibrium solutions of the model.

Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence

A large literature examines demand-side barriers to product adoption. In this paper, we examine supply-side barriers in a setting with limited contract enforcement. We model the relationship between a distributor and its credit-constrained vendors. We show that the optimal self-enforcing arrangement can be implemented by providing vendors with a line of credit and the option to buy additional units at a fixed price. Moreover, the structure of this arrangement is optimal both for profit-maximizing firms and for nonprofit organizations with limited resources. We test the arrangement using a field experiment in rural Uganda. We find that the model-implied optimal arrangement increased distribution significantly compared to a standard contract. However, growth was lower than predicted by the model because vendors were unwilling to extend credit to customers and did not have access to a reliable savings technology. We discuss several recent technological innovations that help to overcome both of these challenges. (JEL C93, D86, G31, L14, L26, L31, O14)

Firms' ownership, employees’ altruism, and product market competition

The paper considers profit-maximizing (or private) firms and socially-concerned (or public) firms that compete against each other on both prices and quality. In this setting, we study how product market competition affects firms' decision to hire altruistic or selfish employees. We show that public firms will always hire altruistic employees, whereas private firms will hire selfish employees only if (i) products are sufficiently differentiated and (ii) they compete against public firms. Lastly, we determine which market configuration is associated with the highest quality and the overall customers’ utility. We find that mixed duopoly is more likely to be preferred when product market competition is tougher.

A Class of Behavioral Models for the Profit-Maximizing Firm

A Class of Behavioral Models for the Profit-Maximizing Firm

A game-theoretic analysis of the impact of government subsidy on optimal product greening and pricing decisions in a duopolistic market

In compliance with environmental and emerging international imperatives, promoting sustainable consumption and production is far due and pivotal for greening supply chains. Rampant demand for environmentally-friendly products and regulatory changes have pressured manufacturing companies to reassess their products and processes. Yet, the cost of greening and its allocation remain challenging tasks. This study investigates government subsidy strategies to encourage firms to transition to green production strategies and improve environmental quality when heterogeneous consumers are sensitive to sustainability. We consider a leader-follower Stackelberg game between two profit-maximizing firms with different green technologies (the followers) and a government (the leader). Those two competing firms sell two differentiated products to a price- and pollution-sensitive market. We first discuss the target level of greenness that can improve the environmental quality and then design the appropriate subsidy rate. We show that the government subsidy can decrease the selling price, increase the market share and the profit from greener products, and positively affect EQ. Contrary to some findings in the literature, we find that a higher subsidy rate may not always simultaneously benefit the environment, social welfare, and social surplus. Finally, we validate our structural results with various numerical examples and sensitivity analyses.

A macroeconomic theory of price determination

Motivated by disputes over the quantity theory of money and the fiscal theory of the price level (the FTPL), I consider price determination in another macro model which can be used both in the short run and in the long run. It is a two-sector model with flexible prices and profit-maximizing firms. Government and the foreign sector are also included. It is assumed that prices are determined by supply and demand in the short run unlike in the quantity theory and the FTPL. In particular the determination of the price of consumption goods is pursued. Finally the FTPL is examined.

A lean view of lean

A lean view of lean

Economic Theories of the Social Sector: From Nonprofits to Social Enterprise

Economic theories of organizations that depart from the standard models of profit-maximizing firms are reviewed. This document will discuss earlier theories of nonprofit organizations that focus on contract failure and will argue that this framework that underlies those theories cannot explain hybrid organizational forms such as social enterprise. These forms aim to balance social and financial objectives in order to avoid the rigidity of both for-profit and nonprofit forms. Conditions under which a social enterprise is likely to be preferable to either a nonprofit or for-profit alternative are characterized. Additionally, this paper highlights the importance of selecting managers and workers who are motivated by the mission of an organization.