Profits and Safety in the Theory of the Firm under Price Uncertainty

Arzac, Enrique R.

doi:10.2307/2526072

Cited by 16 publications

(17 citation statements)

References 10 publications

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“…This conclusion stands when the monopolist follows a pure safety-first criterion and when she uses some other rules for aggregating expected profit and safety margin into one performance measure. Later, Arzac (1976) affirms these results without making any specific assumption about the shock, and, under the pure safety-first criterion, shows some comparative static results: an increase in willingness to pay as well as an increase of a unit tax rate leaves the optimum value of output unchanged. Our findings reverse existing conclusions on the implications of the safety-first principle, as we show that a price-setting monopolist hedges against risk by lowering the price relative to the one that maximises expected profit.…”

Section: Introductionmentioning

confidence: 53%

“…Therefore, the unit tax affects pricing because it affects profit's variance. As explained, when the monopolist sets quantity as in Day et al (1971) and Arzac (1976) the introduction of a tax does not change profit's variance and the firm's decision is unchanged.…”

Section: Cost Changesmentioning

confidence: 94%

“…(2012) use it to discuss portfolio choice, problems relating to economic survival seem to be ignored in recent discussions of firms' behaviour under risk. Our discussion is probably most closely related to Day et al (1971) and Arzac (1976). Discussing safety margins versus expected profit maximisation for a quantity-setting monopolist, Day et al (1971) show that output falls short of the quantity that maximises expected profits when avoidance of ruin matters.…”

Section: Introductionmentioning

confidence: 93%

“…As noted, Day et al (1971) and Arzac (1976) analyse the behaviour of a quantity-setting monopolist under demand fluctuation. They show that the monopolist minimises the risk of negative profits by reducing output to below the output that maximises expected profit.…”

Section: _________________________mentioning

confidence: 99%

“…The explanation for this result is that marginal costs increase by a lot, comparatively speaking, when demand increases above its mean relative to the cost decrease that comes with demand decreases below the mean. 6 Day et al (1971) and Arzac (1976) show results for a cost function of the form ( ) + and their results therefore apply to + as a special case. Our proposition 2 covers the case of ( ) + .…”

Section: _________________________mentioning

confidence: 99%

See 4 more Smart Citations

Pricing as a Risky Choice: Uncertainty and Survival in a Monopoly Market

Andersen

Vetter

2015

Economics

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Roy (Safety First and the Holding of Assets, 1952) argues that decisions under uncertainty motivate firms to avoid bankruptcy. In this paper, the authors ask about the behaviour of a monopolist who pre-commits to price when she has only probabilistic knowledge about demand. They argue that pricing in order to maximise the likelihood of survival explains anomalies such as inelastic pricing, why the firm takes on more risk as gains become less likely, and asymmetric responses to demand and cost changes. When demand is a linear demand, the monopolist's response to an increase in the marginal cost is similar to the response when mark-up pricing is used. That is, there is a one-to-one relationship between an increase of the marginal cost and an increase in price. JEL D42 L12 L21

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Section: Introductionmentioning

confidence: 53%

Section: Cost Changesmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 93%

Section: _________________________mentioning

confidence: 99%

Section: _________________________mentioning

confidence: 99%

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Pricing as a Risky Choice: Uncertainty and Survival in a Monopoly Market

Andersen

Vetter

2015

Economics

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Safety margins versus profit maximization

Vetter

2018

Manage Decis Econ

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JEL Classification: D81; D43; L13; L2Under uncertainty, firms risk bankruptcy. We ask, in symmetric duopoly with stochastic demand, what happens when one firm minimizes the probability of negative profits while the other maximizes expected profits. When fixed costs are small, a firm can reduce the likelihood of negative profits. However, under a large fixed cost, the chance of negative profits increases upon deviation from a profit-maximizing strategy. In any event, if one firm adopts a safety-first strategy, the other firm has higher profits and a better survival chance by maximizing expected profit. Finally, we compare a profit maximizing to a safety-first strategy in relation to ownership and control in firms.

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An analysis of risky financial decisions

1984

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A problem of financing uncertain cost of a project is investigated. The paper analyses the allocation and the loss due to the cost uncertainty. Different formulations of the problem are suggested and compared: expected profits, chance constraint maximization and a utility approach. It is shown that even a risk‐neutral manager is willing to pay a premium to reduce uncertainty. The two approaches to risk, chance constraint versus concave utility, are shown to be non‐equivalent.

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Profits and Safety in the Theory of the Firm under Price Uncertainty

Cited by 16 publications

References 10 publications

Pricing as a Risky Choice: Uncertainty and Survival in a Monopoly Market

Pricing as a Risky Choice: Uncertainty and Survival in a Monopoly Market

Safety margins versus profit maximization

An analysis of risky financial decisions

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