Non-linear revenue evaluation in oligopoly

Alex Dickson, Ian MacKenzie and Petros Sekeris
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Alex Dickson: Department of Economics, University of Strathclyde, Glasgow, UK, G4 0QU

No 611, Discussion Papers Series from University of Queensland, School of Economics

Abstract: In this article we investigate oligopolies where firm decision makers have multiple objectives. We focus on cases where the decision maker is incentivized by profit, and by revenue. Our innovation—motivated by the internal scrutiny that is often placed on revenue—is that managers derive utility from revenue in a potentially non-linear fashion. This allows for incremental changes in revenue to have different incentive effects when it comes to production choice, depending on the amount of revenue generated by the firm. We show that this intuitively appealing extension to the revenue maximisation model reverses some conventional results of that model: we derive conditions where decision makers may actually increase output in the presence of demand contractions. Whether a decision maker increases or decreases output in the presence of a demand shock depends on the concavity of their utility function with respect to revenue. Our findings help us in understanding cases of output growth in the presence of negative demand shocks.

Keywords: Oligopoly; non-profit maximization; delegation (search for similar items in EconPapers)
JEL-codes: L13 L21 (search for similar items in EconPapers)
Date: 2019-09-24
New Economics Papers: this item is included in nep-ind, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:611

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