Variability and average profits - does Oi's result generalize?

Richard Friberg and Kaj Martensen
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Kaj Martensen: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

No 402, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: Average profits of a price taker are increasing in the variability of the output price (Oi, 1961). We show that, for the same reason, average profits of the price taker are increasing in the variability of the price of inputs. We proceed to establish that the same holds for a firm with a downward sloping demand curve. Unless the inverse demand curve of the firm with market power is very convex, the profit function of the price taker forms an upper limit for the convexity of profit (assuming constant curvature of costs).

Keywords: cost uncertainty; convexity of profit function (search for similar items in EconPapers)
JEL-codes: D80 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2000-09-14
New Economics Papers: this item is included in nep-mic and nep-tid
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Citations: View citations in EconPapers (2)

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