Paper by Murray/Towler on the nature of profit seeking

A new working paper (to be found here) by two PhD students in our school muses about whether firms optimise profits or returns-to-costs. Normally in economic papers you see the presumption that firms optimise profits, but from the point of view of investors allocating in lots of firms at the same time, it would seem to make more sense to presume they maximise returns. In many situations this will amount to the same thing, but not all situations: you for instance get a divergence as soon as you have some barrier to entry, which is rather common. Its the sort of paper that makes you remember your 3rd year micro lessons. Anyhow, if this is your cup of tea, here is their abstract:

We introduce a theory of return-seeking firms to study the differences between this and standard profit-maximising models. In a competitive market return-maximising firms minimise average total costs leading to output choices independent of price movements. We investigate the poten- tial for mark-ups over cost under both competitive and non-competitive market structures and characterise output and input choices under both, amongst a series of other interesting results. We also extend the model in the case of discrete output and input space and show what conditions are required of demand shifts for firms to modify their production plan.

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Luci an
Luci an
2 years ago

Good one