Monopoly power and the firm’s valuation: a dynamic analysis of short versus long-term policies
Suleyman Basak and
Anna Pavlova
Economic Theory, 2004, vol. 24, issue 3, 503-530
Abstract:
Recent anti-trust cases exacerbated the concerns of investors regarding the effects of a firm’s monopoly power on its production choice, shareholder value, and the overall economy. We address this issue within a dynamic equilibrium model featuring a large monopolistic firm whose actions not only affect the price of its output, but also effectively influence the valuation of its stock. The latter renders time-inconsistency to the firm’s dynamic production choice. When the firm is required to pre-commit to its strategy, the ensuing equilibrium is largely in line with the predictions of the textbook monopoly model. When the firm behaves in a time-consistent manner, however, the predictions are strikingly at odds. The trade-off between current profits and the valuation of future profits induces the firm to increase production beyond the competitive benchmark and cut prices. This policy may result in destroying shareholder value, and does indeed fully wipe out the firm’s profit in the limit of the decision-making interval shrinking to zero, in line with the Coase conjecture. Copyright Springer-Verlag Berlin/Heidelberg 2004
Keywords: Monopoly; Asset pricing theory; General equilibrium; Short-sighted; Time-consistency; Coase conjecture. (search for similar items in EconPapers)
Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-004-0499-z (text/html)
Access to full text is restricted to subscribers.
Related works:
Working Paper: MONOPOLY POWER AND THE FIRM'S VALUATION: A DYNAMIC ANALYSIS OF SHORT VERSUS LONG-TERM POLICIES (2003) 
Working Paper: Monopoly Power and the Firm's Valuation: A Dynamic Analysis of Short versus Long-Term Policies (2002) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:24:y:2004:i:3:p:503-530
Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2
DOI: 10.1007/s00199-004-0499-z
Access Statistics for this article
Economic Theory is currently edited by Nichoals Yanneils
More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().