Profit maximization mitigates competition

Egbert Dierker and Birgit Grodahl
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Birgit Grodahl: Økonomisk Institut, Københavns Universitet, Studiestræde, DK-1455 København, DENMARK

Economic Theory, 1995, vol. 7, issue 1, 139-160

Abstract: We consider oligopolistic markets in which the notion of shareholders'utility is well-defined and compare the Bertrand-Nash equilibria in case of utility maximization with those under the usual profit maximization hypothesis. Our main result states that profit maximization leads to less price competition than utility maximization. Since profit maximization tends to raise prices, it may be regarded as beneficial for the owners as a whole. Moreover, if profit maximization is a good proxy for utility maximization, then there is no need for a general equilibrium analysis that takes the distribution of profits among consumers fully into account and partial equilibrium analysis suffices.

Date: 1997-11-09
Note: Received: July 8, 1994; revised version December 23, 1994
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Journal Article: Profit Maximization Mitigates Competition (1996)
Working Paper: Profit Maximization Mitigates Competition (1994)
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