Profit Constraint Research Articles

Ramsey Pricing and Environmental Regulation

The optimal pricing rule for public enterprises maximizing welfare under a profit constraint is well known. The paper extends the analysis to the case of production externalities and considers price regulation under various forms of environmental regulation which is assumed to be performed by a separate environmental agency. The modified Ramsey prices depend on the institutional setting. If the enterprise is liable for the damages it causes the externality is fully internalized. If an environmental tax is imposed the way its revenue is spent turns out to be crucial. The connection to Pigouvian taxes under imperfect competition is illuminated.

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.

Privatization: price-capping and reliability

This paper examines the issue of the privatization of public monopolies using traditional theories of the behaviour of firms. The public firm is modelled as an expected-size maximizer subject to an expected profit constraint, and the privatized firm as an expected-profit maximizer subject to a regulatory price-cap. For a single-product monopoly the burden of adjustment following privatization is shown to fall mainly on the capital stock. But for a two-product monopoly facing peak and off-peak demand, peak consumers are shown to suffer significant price increases and reductions in reliability, whereas off-peak consumers enjoy substantial price decreases.

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.

Constrained sales maximization under a linear technology

This paper employs the activity analysis framework of linear programming to solve the decision problem of maximizing sales revenue in the presence of a minimum acceptable profit constraint. One of the advantages of using this model relative to the standard neoclassical approach is that, in addition to determining the firm's optimal product mix, we can also explore the ramifications of constrained revenue maximization on the imputed valuation of the firm's resources. The primal and dual solution values for the constrained revenue maximization problems are then compared with those derived from a linear profit maximization model. A computational technique is offered which demonstrates how constrained revenue maximization is carried out in actual practice.

‘Profit’ variability in for-profit and not-for-profit hospitals

This paper proposes two tests of the hypothesis that not-for-profit hospitals (NFPs) behave differently than for-profit hospitals. The profit variability test states that the profits of an NFP will be less variable over time than profits of a for-profit hospital if the NFP maximizes utility subject to a profit constraint. The second test examines whether NFP profits respond less to change in exogenous factors, such as Medicare reimbursement rates, than profits of for-profit hospitals. Both tests, performed on panel data from 1983 to 1988, support the hypothesis that NFPs behave differently than for-profit hospitals.

Collective Diversification : Manchester Cotton Merchants and the Insurance Business in the Early Nineteenth Century

It has been claimed that the diversified mercantile capitalist of eighteenth-century Britain was replaced by the specialist industrialist of the nineteenth. This study of Manchester cotton merchants who moved into fire insurance in the 1820s examines the neglected strategy of collective diversification. It argues that the merchants' decision to diversify cannot be explained by short-term financial or economic considerations arising out of the insurance or cotton markets and only partly by long-run issues such as profit maximization and constraints on growth. Collective diversification is best understood as part of a broader attempt to create a system of interlocking services by an urban oligarchy seeking both to improve the economic infrastructure of their region and to consolidate the economic and political power of their group.

Compagnie et consulat : lois germaniques et emploi des travailleurs sur les plantations de Samoa, 1864-1914

Summary. Compagnie et Consulat. Plantation development in Samoa until the outbreak of the First World War was overwhelmingly dominated by the Hamburg firm of J. C. Godeffroy & Sohn and their commercial successor, the DHPG. Far from being a triumph of free enterprise capitalism, the company's Samoan plantations were only successful because the directors in Berlin and the managers on-the-spot so assiduously and successfully courted state support. During the 1860s and 1870s the local company manager doubled as the German consul, and operated in the absence of any regulations covering the imported labour force. Even when protective legislation was introduced between 1882 and 1884 the material conditions of labourers on the DHPG's plantations deteriorated. Since the DHPG plantations constituted Germany's sole political claim to Samoa, a succession of German consuls (by now a post for a career diplomat) functioned as the official arm of the firm and they worked to ensure its survival in the face of critical labour shortages and severe profitability constraints. Consular co-operation involved easing the company's labour crisis, minimising its labour costs and by endorsing a system of harsh discipline, and was reinforced by the company directors lobbying their political and personal contacts in the Colonial Department of the Foreign Office, and sometimes even the Chancellor himself. Even after the hoisting of the German flag over the western islands of Samoa in 1900, official policy continued in the DHPG's favour. Annexation was followed by an influx of smaller cacao and rubber plantation companies and individual planters who languished while the DHPG prospered in the circumstances of privileged access to New Guinea labour. Other planters had to employ expensive Chinese labour, and they attributed their problems to Governor Wilhelm Soif s partiality towards the DHPG. But Solf survived their attacks and the status quo continued, in part because he was supported the company which dominated German Samoa and which wielded most influence in Berlin, the DHPG. The paper concludes by suggesting that although the DHPG grew up under the shelter of massive state and government support and was harsh in its treatment of labourers, parallels are to be found in the British Pacific. Depending on wider political and economic circumstances, the British labour trade could display all the abuses of its German counterpart.

UNCERTAINTY AND THE POSITIVE THEORY OF THE PUBLIC ENTERPRISE*

ABSTRACTThis paper extends the analysis of Rees (1984a) of a public enterprise pursuing a size‐related objective in the face of uncertain demand to a situation where its managers may be risk neutral or risk averse and where the public enterprise may produce more than one output. The optimal pricing policy of the public enterprise is analysed and the importance of not only the expected profit constraint but also the attitude to risk of the public enterprise in determining its relative prices is demonstrated.

Good Regulatory Regimes

Assuming simple functional forms, numerical methods are used to analyze linear regulatory rules that include cost-plus and price-cap regimes. Regulators are assumed to observe actual cost, but not the disutility of cost reduction, and are assumed unable to impose taxes or make transfers. Best linear regimes depend importantly on the level and form of uncertainty, the regulatory objective function, and the firm profitability constraint. Under uncertainty, regimes in which price depends in part on actual cost generally substantially outperform pure price caps, particularly in terms of consumers' surplus.

Production theory with profit‐constrained revenue‐maximization: The duality approach

AbstractThis paper derives a general version of Baumol's production theory, where the main behavioral assumption is ‘revenue maximization subject to a profit constraint’ instead of ‘profit maximization’. This theory turns out to be analogous to the neoclassical (competitive) production and consumption theories. Employing the fruitful duality approach it is presented here in a unified and very economical form that provides a complete and general analysis of the comparative static behavior of Baumol's firm.

An Examination of the Effect of Ownership Form on Price Efficiency: Proprietary, Cooperative and Municipal Electric Utilities

Recent works by De Alessi [5; 6], Furobotn and Pejovich [10], and Demsetz [7] suggest that the different structures of property rights conveyed by different institutional arrangements result in cost-reward distributions which affect economic outcomes systematically. Privately owned, profit maximizing firms which are regulated are subject to a profit constraint which weakens the owners' property rights. The consequences of the profit constraint are possibly very significant. If the property rights of the owners are reduced by an effective constraint on profits, the owners have less to gain from increased economic efficiency, and managers may have more flexibility in increasing their own personal utility. Private ownership has generally been equated with profit maximization as the objective of the firm, while public ownership has been equated with objectives other than profit maximization. An entire class of firms, the cooperatives, have been virtually ignored in the literature. Cooperatives, while privately owned, presumably do not seek to maximize profits. Since cooperative firms lie along a continuum between proprietary and municipal firms, they offer an unusual opportunity to separate the effect of ownership form from the profit maximization objective. Most of the literature dealing with the economic effects of ownership form has contrasted publicly owned presumably not-for-profit municipal utilities and privately owned presumably profit maximizing proprietary utilities. While substantial theoretical and econometric problems exist in the area, it appears that municipals are less economically efficient than the proprietary utilities.

Cycles of Illegality: Antitrust Violations in Corporate America

Cycles of Illegality: Antitrust Violations in Corporate America

Power and Goal Setting in Channel Negotiations

The authors investigate the use of a moderately high externally set profitability constraint as a goal-setting mechanism for controlling channel negotiators. Equal and high power channel members are shown to be made more profitable by the constraint. Low power channel members are shown to be made less profitable by the same constraint. The analysis is done in the context of an experimental market simulation that reveals the impact of the constraint and power variables on both quantity and quality of transactions completed as well as dynamics of negotiations over time.

Public pricing under imperfect competition

Existing literature on second-best pricing assumes that regulatory control encompasses all industries subject to distortion. This paper extends the theory in a game-theoretic framework to incorporate market power outside the regulated sector. We find that in this situation, price always exceeds marginal cost in the public firm and that the profit constraint for the public firm need not be binding. In addition, the existence of pricing distortions outside the regulated sector can actually increase welfare.

Integrative bargaining in a competitive market

The behavioral decision theory literature was used to identify the determinants of negotiation success in an integrative bargaining, free-market exercise. This study provides a novel methodology for studying negotiation. Specifically, buyers and sellers were allowed to engage in negotiations with as many competitors as possible in a fixed time period. The results suggest that integrative bargaining behavior increases and the market converges toward a Nash equilibrium as negotiators gain experience. In addition, the results suggest that (1) positively framed negotiators (“What will be my net profit from the transaction?”) complete more transactions than negatively framed negotiators (“What will be my expenses on this transaction?”), (2) negotiators who are given moderately difficult profit constraints in order to be allowed to complete a transaction achieve more profitable transactions than negotiators without such constraints, and (3) both framing and the existence of constraints affect the total profitability of the negotiator.

Large-Market Cournot Equilibria in Labour-Managed Economies

A basic point in the theory of labour-managed market economies is the fundamental role of free entry in order to achieve efficiency (see Dreze, 1974; Greenberg, 1979; Ichiishi, 1977; Meade, 1972, 1979; Vanek, 1970). But modelling a framework of firm selection process can be undertaken with different approaches. Dreze, Meade and Vanek, for example, consider a perfectly competitive process; Greenberg and Ichiishi build models of coalition formation in the spirit of core theory. In the present study we take the other classical way, the Cournot oligopoly theory. In order to capture the effect of increasing competition in the Cournot oligopoly, two kinds of models have long been traditionally elaborated. In the first, the effects of an exogenously increasing number of active firms facing a given demand function are examined (see Okugushi, 1976; Ruffin, 197 1; Seade, 1980). In the second, initiated by Shubik (1959), the number of active firms and the size of the market are simultaneously increased at the same rate. In this case, what is sought is to isolate some sort of pure effect of an increasing number of competitors, and not the combined result of a greater number of firms facing a constant market. But in the two kinds of approaches the number of active firms are not explained by the theory. What is missing is consideration of the role of potential competitors. Recently Novshek (1980) proposed to give the same status to potential competitors and active firms, i.e. to consider that the potential competitors have a Cournot-type behaviour. Hence the very fact that they are not active comes from optimizing behaviour, in the same way as, for active firms, a positive production level comes from maximizing behaviour. A potential competitor taking the production of the active firms as given and maximizing his objective function remains potential only because he does not find it attractive to produce. Hence we get a unified theory which explains the number of active firms. For the case of U-shaped average cost firms, Novshek (1980) has shown that, in sufficiently large markets, first, such a free-entry Cournot equilibrium exists and, second, it is approximately a perfectly competitive equilibrium state. In this paper we study the welfare properties of free entry Cournot equilibria in labour-managed economies.' We adopt Novshek's notion of free entry which is more appealing than the classical zero profit constraint.2 A recent paper by Hill and Waterson (1983) shows that, with the zero profit definition of free entry, and strong assumptions of decreasing marginal labour productivity, uniqueness and stability of equilibria, Cournot equilibria are asymptotically efficient and furthermore have the same number of active firms in both the labour-managed and entrepreneurial frameworks. Under much weaker assumptions the graphical analysis of this paper shows that asymptotic

Dumping, adjustment costs and uncertainty

Domestic demand uncertainty in the presence of adjustment costs can cause profit-maximizing firms to sell output abroad at a loss. Firms may dump output at prices below long-run marginal and average productions costs with probability arbitrarily close to one. The model predicts dumping is particularly likely in process industries such as steel. Closed form dumping solutions and interesting comparative statics are obtained. Also, the effect of domestic competition on dumping is examined. I find domestic competition increases total dumping, although a monopolist maximizing output subject to a zero expected profit constraint will dump more than a competitive industry.

Optimal Nonuniform Prices

We consider optimal nonuniform pricing schedules, where the price depends upon the amount purchased. Such schedules are regularly used by public utilities and other services. Welfare-optimal nonuniform prices are related to the theory of optimal uniform prices developed by Ramsey. We characterize situations in which upward or downward discontinuities in pricing schedules are optimal. Our results are applicable to a number of related problems, including optimal taxation, insurance, and incentives. Economic theory has confined most of its attention to markets with uniform prices, in which the price per unit charged is invariant to the level of a customer's purchases. This focus is warranted when goods are resellable, since any attempt to charge nonuniform prices could be circumvented by reselling amongst customers. But when goods are not resellable, nonuniform prices are not only possible but common. Public utilities have declining block pricing, with lower unit charges for large levels of consumption. Many agencies providing services, including communications, transportation-even education-use two-part pricing, with a fixed entry or retainer charge, and a further charge per unit consumption. Nonuniform price schedules can be expected to be ever more common as services become a larger fraction of total output. The increasing prevalence of nonuniform pricing policies have made them the focus of recent public and economic attention. Oi (1971), Feldstein (1972), and Ng and Weisser (1974) have examined optimal two-part pricing policies. Leland and Meyer (1976) examine block pricing, and show by example that optimal welfare policies may require nonuniform prices if zero profit constraints are binding. In this paper, we consider arbitrary nonuniform pricing policies, using variational techniques. Two-part and block pricing schedules are, of course, special cases of the environment we consider. The work most closely related to our examination is the seminal paper by Spence (1978) and subsequent analysis by Roberts (1979). Spence, however, does not pay explicit attention to the key role played by constraints on optimal pricing schedules. Roberts considers upward price discontinuities which lead to bunching of consumers at a given level of consumption, but not downward price discontinuities, which lead to regions in which no consumer chooses to consume (gaps). Bunching or gaps may appear in the optimal price schedule even when underlying demand and cost functions are smooth and well behaved. The prevalence of discontinuous pricing schedules (e.g. the block pricing structures of public utilities) argues that these questions are of practical as well as theoretical interest.