A Model of Market Power, Valuation and the Firm's Returns

Stavros B. Thomadakis

Bell Journal of Economics, 1976, vol. 7, issue 1, 150-162

Abstract: This paper presents a model in which risk is admitted through random behavior of the firm's demand and cost functions. In a single period context the effects of monopoly power are analyzed with respect to optimal output and valuation of the firm, as well as relative to the firm's level of systematic risk as exhibited in its market return. In a multiperiod context the results are extended to an infinite horizon and a closed-form valuation expression is derived. Risk in the firm's future investment opportunities is shown to affect both the firm's valuation and changes in such valuation over time. The impact of this type of "growth" risk is directly linked to the firm's ability to obtain monopoly rents in its product market.

Date: 1976
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