Working Paper: CEPR ID: DP3425
Authors: Suleyman Basak; Anna Pavlova
Abstract: This article develops a multi-period production model to examine the optimal dynamic behaviour of a large monopolistic value-maximizing firm that manipulates its valuation as well as the price of its output. In the pre-commitment equilibrium the firm?s output and labour demand are decreased, while the price of consumption is increased, as compared with its competitive counterpart. Profits and the firm's value can, however, be either increased or decreased. In the time-consistent equilibrium the firm?s output and labour demand are increased, while the price of consumption is decreased. More strikingly, the profits in every period are decreased, and may even go negative, while the firm's value can be either lower or higher than in the competitive benchmark. In the continuous-time limit, while the pre-commitment equilibrium retains its basic discrete-time structure, the time-consistent equilibrium tends to the limit of zero profits and hence zero firm's value.
Keywords: Asset Pricing Theory; General Equilibrium; Monopoly; Shortsighted; Timeconsistency
JEL Codes: D42; D51; D92; E20; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monopoly Power (D42) | Output (Y10) |
| Monopoly Power (D42) | Labor Demand (J23) |
| Monopoly Power (D42) | Consumption Prices (D11) |