A Test of Profit Maximization

Marcus Asplund

No 6177, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper aims at testing the maintained assumption that firms' objective is to maximize the expected net present value (ENPV) of profits. The idea is to examine pricing behaviour of a monopolist facing a dynamic demand where current sales influence future demand. Empirically, I estimate an Euler equation implied by maximization of ENPV of profits on data from the Swedish Tobacco Monopoly's sales of moist snuff (an addictive tobacco product) during the period 1917-1959. It is found that the monopolist's prices are well below those that would maximize ENPV of profits.

Keywords: Firm behaviour; Profit maximization (search for similar items in EconPapers)
JEL-codes: L12 L21 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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