Profit-maximizing Firms Research Articles

Evolutionary competition in a mixed market with socially concerned firms

In this paper we study an oligopoly market where profit-maximizing firms and socially concerned firms compete in quantities. Confronting remarks by Milton Friedman and Gary Becker, we are using an evolutionary setting to investigate the endogenous choice of the proper objective of business firms and the influence of product differentiation on the long run survival of firms which pursue non-profit motives. We find that firms which consider a combination of profit and consumer welfare can indeed have larger market shares and profits than their profit-maximizing rivals. One insight is that it might pay off for shareholders to consider stakeholder welfare, but that the level of social concern should not be too high. Based on a strategy׳s profitability, we consider asynchronous evolutionary updating with firms selecting Nash quantities or choosing best replies to the expected market quantity. Here we observe that the consumers׳ willingness to pay a price premium for products is crucial for the long run survival of socially concerned firms. Depending on the degrees of product differentiation and social concern, long run outcomes consist either of both types of firms or only one type of firm. If the firms׳ propensity to switch between a social or a profit-maximizing strategy is sufficiently large, steady states are unstable and even complicated dynamics can occur.

Imperfect Markets, Imperfect Competition and Basic Model

This paper has focused on static environments or on single-agent dynamic decision problems. Many economic policy debates, however, turn on quantities that are inherently linked to dynamic competition, such as entry and exit costs, the returns to advertising or research and development, the adjustment costs of investment, or the speed of firm and consumer training. Estimating these dynamic parameters has been seen as a major challenge, both conceptually and computationally. In the perfectly competitive markets, the firms do not perceive they have any market power. Imperfect competition is a market situation where individual firms have a measure of control over the price of the commodity in an industry. In these conditions we can identify a firm or e few firms that can affect the market price of their outputs. These firms can be classified as imperfect competitors. Normally, imperfect competition arises when an industry's output is supplied only by one, or a relatively small number of firms. Profit-maximizing firms in an imperfectly competitive market will charge a mark-up of price over marginal costs. The size of the mark-up depends on the price elasticity of demand and on the degree of competition, such that an increase in the number of firms reduces the mark-up. In a general equilibrium setting, imperfect competition leads to a sub-optimal outcome (a deviation between MRS and MRT). Since international trade increases market competition, as foreign firms start to compete on the domestic market and vice versa, international trade improves economic efficiency (by diminishing the deviation between MRS and MRT), the so-called pro-competitive gains from trade. A basic model for imperfect markets is given for two firms, firm 1 and firm 2. We develop a model of advertising in a differentiated duopoly in which firms first decide how much to invest in cooperative or predatory advertising and then engage in product market competition (Cournot or Bertrand). DOI: 10.5901/mjss.2014.v5n16p706

Who posts performance bonds and why? Evidence from China's CEOs

Despite their theoretical value in tackling principal–agent problems at low cost to firms there is almost no empirical literature on the prevalence and correlates of performance bonds posted by corporate executives. We show that they are an important feature in today's CEO labour market in China: around one-tenth of corporations deploy performance bonds and they are equivalent to around 14% of CEO cash compensation. Consistent with principal–agent theory bonds are negatively associated with firm sales volatility. The complementarity between bonds and other incentive mechanisms such as bonuses and stock holding is consistent with optimal reward structures for multi-tasking agents. Those CEOs posting bonds are higher in the Communist Party ranks, were promoted via tournaments, and run larger firms, findings consistent with using bonds as an incentive to attract and retain the most able workers. Although state-owned enterprises are just as likely as privately owned ones to use bonds in CEO contracts, some of the theoretical predictions which assume profit-maximising firms do not hold where the state has an ownership stake.

A frontier functions approach to optimal scales of sustainable production

AbstractThis paper translates the concepts of sustainable production to three dimensions of economic, environmental and ecological sustainability to analyze optimal production scales by solving optimizing problems. Economic optimization seeks input-output combinations to maximize profits. Environmental optimization searches for input-output combinations that minimize the polluting effects of materials balance on the surrounding environment. Ecological optimization looks for input-output combinations that minimize the cumulative destruction of the entire ecosystem. Using an aggregate space, the framework illustrates that these optimal scales are often not identical because markets fail to account for all negative externalities. Profit-maximizing firms normally operate at the scales which are larger than optimal scales from the viewpoints of environmental and ecological sustainability; hence policy interventions are favoured. The framework offers a useful tool for efficiency studies and policy implication analysis. The paper provides an empirical investigation using a data set of rice farms in South Korea.

Strategic delegation in consumer cooperatives under mixed oligopoly

The main aim of this paper is to study the propensity of consumer cooperatives (Coops) to use incentive schemes in situations of strategic interaction with profit-maximizing firms (PMFs). Our model provides a reason why Coops are less prone than PMFs to pay variable bonuses to their managers. We show that this occurs under price competition when in equilibrium the Coop prefers to pay a flat wage to its manager relying instead on her intrinsic motivation, whereas the profit-maximizing rival adopts a variable, high-powered incentive scheme. The main rationale is that, by recruiting a manager whose preferences are aligned with the company goals (e.g., a consumer-owner), the Coop is per se highly expansionary in term of output. Therefore, the Coop does not need to rely on an externally hired manager who sets prices aggressively to expand market share and quantity. Furthermore, adopting a monetary reward based on sales and profits leads to distorted incentives with respect to the Coop’s goal, which after all is the welfare of its members.

Evolutionary Competition in a Mixed Market with Socially Concerned Firms

In this paper we study an oligopoly market where profit-maximizing firms and socially concerned firms compete in quantities. Confronting remarks by Milton Friedman and Gary Becker, we are using an evolutionary setting to investigate the endogenous choice of the proper objective of business firms and the influence of product differentiation on the long run survival of firms which pursue non-profit motives. We find that firms which consider a combination of profit and consumer welfare can indeed have larger market shares and profits than their profit-maximizing rivals. One insight is that it might pay off for shareholders to consider stakeholder welfare, but that the level of social concern should not be too high. Based on a strategy’s profitability, we consider asynchronous evolutionary updating with firms selecting Nash quantities or choosing best replies to the expected market quantity. Here we observe that the consumers’ willingness to pay a price premium for products is crucial for the long run survival of socially concerned firms. Depending on the degrees of product differentiation and social concern, long run outcomes consist either of both types of firms or only one type of firm. If the firms’ propensity to switch between a social or a profit-maximizing strategy is sufficiently large, steady states are unstable and even complicated dynamics can occur.

Absorptive capacity and R&D strategy in mixed duopoly with labor-managed and profit-maximizing firms

In a mixed duopoly with a labor-managed firm and a profit-maximizing firm coexisting, this paper explores the effect of technology absorptive capacity on firms' output decision, R&D investment decision and social welfare. Firstly, we develop a two-stage R&D game model on the basis of cost-reducing R&D with spillover and absorptive capacity. Secondly, we explore the strategic interactions of output, R&D investment and social welfare respectively in the mixed duopoly with a labor-managed and a profit-maximizing firms. Finally we analyze the effects of absorptive capacity on output decision, strategic investment decision and social welfare respectively. The research suggests that labor-managed firms employ less workers and produce less outputs while they invest more in R&D than that of profit-maximizing firms. Whether the effect of absorptive capacity increases R&D investment of labor-managed firms or not depends on the returns to scale. However, it bears no relationship to the returns to scale of the profit-maximizing firm.

Reviewing Antitrust Policies: The Use of Vertical Information-Sharing in Achieving Collusion

In the absence of antitrust regulations, rational profit-maximizing firms in an oligopoly may freely act in consort to reach a consensus and to maintain prices above the competitive level. However, in light of potential exposure to antitrust investigations and prospective heavy sanctions, firms attempt to achieve collusive outcomes without resorting to explicit agreements. One mechanism that may promote such tacit collusion is information-sharing; that is, the otherwise competing firms exchange their private information in order to set and maintain supra-competitive prices. Thus far, the attention of the antitrust authorities and scholars has focused on the phenomenon of horizontal information-sharing, i.e., the exchange of information between rival firms that operate at the same economic level. Contrary to this body of work, this article focuses on the effect of vertical information-sharing on the ability of the firms to collude. Recently, it has been shown that when competing retailers disclose their private information to a mutual manufacturer, the wholesale price set by the latter provides a signal to the retailers. This signal allows the retailers to fix prices without the necessity of any direct communication between them, thereby achieving a collusive outcome while avoiding the risk of being exposed to the scrutiny of the antitrust authorities. Another fascinating aspect of the collusion achieved through vertical information-exchange is that it can generate social costs higher than those of direct collusion. In other words, from the social welfare perspective, in certain instances — such as those discussed in this article — the social planner would be better off allowing competing firms to collude directly, rather than exchanging their private information via their mutual manufacturer. Therefore, understanding the heretofore neglected impact of vertical information-sharing is important not only for effective antitrust laws, but also for developing effective policies and regulations. Calling into focus the strategic behavior of competing retailers that may produce outcomes similar — or even severer — than those resulting from collusive agreement based on horizontal information-sharing, this article is the first attempt to address the legal implications of such a scheme, while integrating the findings of the economic literature. In particular, this Article argues that: (1) antitrust authorities should broaden the scope of their scrutiny to include vertical information-sharing; and (2) case law permits such information-sharing to be condemned under the Sherman Act if it produces anti-competitive effects without counterbalancing pro-competitive effects.

Privatization, Underpricing and Welfare in the Presence of Foreign Competition

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit-maximizing firms. In particular, we examine pricing below marginal cost by public firm, the optimal degree of privatization and, the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and it earns positive profits.

Industry equilibrium with open-source and proprietary firms

We present a model of industry equilibrium to study the coexistence of open-source and proprietary firms. Two novel aspects of the model are (i) participation in open source arises as the optimal decision of profit-maximizing firms, and (ii) open-source and proprietary firms may (or may not) coexist in equilibrium. Firms decide their type and investment in R&D, and sell packages composed of a primary good and a complementary private good. Open-source firms share their technological advances on the primary good, whereas proprietary firms keep their innovations private. The main contribution of the paper is to determine conditions under which open-source and proprietary firms coexist in equilibrium. Interestingly, this equilibrium is characterized by an asymmetric market structure, with few large proprietary firms and many small open-source firms. We also study the limiting economy and present conditions under which large numbers favor cooperation in R&D.

Social capital as a distinctive feature of Social Economy firms

In recent years, the growing importance in developed countries of the Social Economy sector and the contribution of social capital to regional economic development are being studied in depth. Linking these two fields of research, the aim of the present work is to analyse the social capital endowments of Social Economy firms in comparison to those in traditional profit-maximizing firms. To do so, a literature review will be firstly carried out to clarify both the concept of social capital and, more specifically, its relation with entrepreneurship and social enterprises. In the empirical section, the social capital endowments both of social firms (cooperatives and owned-worker enterprises) and traditional firms are compared using data from two surveys conducted in Andalusia, a lagged Spanish region with long tradition in the Social Economy sector. Results show that social capital endowments measured through cooperation agreements and company links with local suppliers and costumers are higher in cooperatives and worker-owned companies. Therefore, Andalusian authorities must continue with its support policy to these enterprises as a mean to reinforce the regional economic development.

Information acquisition under uncertainty: The case of labor-managed and profit-maximizing firms coexist

This paper analyzes the output decision and welfare implications of acquiring information under uncertainty for the duopoly market coexisted by a labor-managed firm (LMF) and a profit-maximizing firm (PMF). By establishing objective functions of LMF and PMF, it constructs the theoretical framework to discuss the role of information in the duopoly firstly. Then, based on the comparative static analysis, it discusses the effects of the market demand information and cost information on expected output and welfare. Finally it compares the role of information in LMF with the case of PMF, and the role of information in the LMF–PMF duopoly with those of LMF–LMF duopoly and PMF–PMF duopoly. It is shown that whereas the LMF's behavior is analogous to that of the PMF twin in some circumstances, the former may be entirely different from the latter in others. The LMF will be more sensitive to the information.

Optimal Compensation Structure in Consumer Cooperatives Under Mixed Oligopoly

The main aim of this paper is to derive properties of an optimal compensation scheme for consumer cooperatives (Coops) in situations of strategic interaction with profitmaximizing firms (PMFs). Our model provides a reason why Coops are less prone than PMFs to pay variable bonuses to their managers. We show that this occurs under price competition when in equilibrium the Coop prefers to pay a straight salary to its manager whereas the profit-maximizing rival adopts a variable, high-powered incentive scheme. The main rationale is that, due to consumers’ preferences, a Coop is per se highly expansionary in term of output and, therefore, does not need to provide strong strategic incentives to their managers to expand output aggressively by undercutting its rival.

Modeling Interactions between User and Producer Innovation: User-Contested and User-Complemented Markets

Innovation has traditionally been seen as the province of producers. However, theoretical and empirical research now shows that individual users – consumers – are also a major and increasingly important source of new product and service designs. In this paper, we build a microeconomic model of a market that incorporates demand-side innovation and competition. We explain the conditions under which firms find it beneficial to invest in supporting and harvesting users’ innovations, and show that social welfare rises when firms utilize this source of innovation. Our modeling also indicates reasons for policy interventions with respect to a mixed user and producer innovation economy. From the social welfare perspective, as the share of innovating users in a market increases, profit-maximizing firms tend to switch “too late” from a focus on internal R&D to a strategy of also supporting and harvesting user innovations. Underlying this inefficiency are externalities that the producer cannot capture. Overall, our results explain when and how the proliferation of innovating users leads to a superior division of innovative labor involving complementary investments by users and producers, both benefitting producers and increasing social welfare.

Moral Hazard, Optimal Contracting and Strategic Competition

This paper opens up the black box of firms' profit functions to consider the affect of modelling firms as principal-agent relationships on the outcomes of strategic competition. Using a parameterised model it is found that for large market sizes moral hazard reduces expected output more severely than if firms restricted output to jointly maximise profits i.e. collude. This result is obtained even though firms use fully optimal non-linear incentive contracts. Additionally profit-maximising firms may not always invest in a perfect monitoring technology even if it is welfare enhancing. As such there may be an over-reliance on incentive contracts from a welfare perspective. Overall this paper highlights the importance of modelling firms' internal workings when addressing regulatory and other industrial organisation questions.

Undesirable competition

We show that the entry of private profit-maximising firms makes the consumers worse off compared to having a nationalised monopoly. Such entry increases the nationalised firm’s profit, industry profit, and social welfare, at the expense of the consumers. Our result is important for competition policy.

Spatial agent-based modeling of household and firm location with endogenous transport costs

The paper describes a spatial economic agent-based model (ABM), consistent with the principles of new economic geography (NEG), which allows the discrete-time evolutionary simulation of complex interactions of household and firm location choices. In contrast with the current ABM approaches, it considers a multi-regional (multi-urban) setting to enable a more realistic representation of decisions related to commuting, migration and firm (re)location. The model allows simulating spatially differentiated, multi-commodity markets for land and labor in a system of cities and the behavior of profit-maximizing firms with multi-regional asset investment decisions, incorporating endogenous transport costs with congestion effects. It also accounts for the impact of agglomeration forces on industrial location choices and the formation of urban development patterns. The conceptual framework and main components of the spatial ABM are presented and several implementation issues are discussed with regard to possible case-specific applications and policy scenarios.

‘Just one of us’: consumers playing oligopoly in mixed markets

Consumer cooperatives represent a highly successful example of democratic form of enterprises operating in developed countries. They are usually medium to large-scale companies competing with the profit-maximizing firms in the retail sector. This paper describes this situation as a mixed oligopoly in which consumer cooperatives maximize the utility of consumer-members and, in return, refund them with a share of the profits corresponding to the ratio of their individual spending to the cooperative’s total sales. We show that when consumers possess quasi-linear preferences over a bundle of symmetrically differentiated goods, and companies operate using a linear technology, the presence of consumer cooperatives positively affects total industry output, as well as welfare. The effect of cooperatives on welfare proves to be even more significant when goods are either complements or highly differentiated, and when competition is à la Cournot rather than à la Bertrand.

The Persistence Of Sexual Discrimination In The Workplace

Measured by an increasing labor force participation rate for women, a falling dissimilarity index for occupational sex segregation, and a declining male/female earnings gap, there has been increasing integration of women into the workforce in the U.S. over the last fifty years. This increased diversity should lead to increased productivity, thus inducing profit-maximizing firms to encourage it. However, sexual segregation has persisted for so long that it must be beneficial for the capitalist system as a whole. By keeping women separate and subservient with lower wages than men, firms exploit sexual discrimination and are able to maintain higher profits.

The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness?

Some twenty years ago, Harvard Business School economist and strategy professor Michael Porter challenged conventional wisdom about the impact of environmental regulation on business by declaring that well-designed regulation could actually enhance competitiveness. The traditional view of environmental regulation held by virtually all economists until that time was that requiring firms to reduce an externality like pollution necessarily restricted their options and thus by definition reduced their profits. After all, if profitable opportunities existed to reduce pollution, profit-maximizing firms would already be taking advantage of them. Over the past twenty years, much has been written about what has since become known simply as the Porter Hypothesis. Yet even today, we continue to find conflicting evidence concerning the Porter Hypothesis, alternative theories that might explain it, and oftentimes a misunderstanding of what the Porter Hypothesis does and does not say. This article examines the key theoretical foundations and empirical evidence concerning the Porter Hypothesis, discusses its implications for the design of environmental regulations, and outlines directions for future research on the relationship between environmental regulation, innovation, and competitiveness.