Working Paper: CEPR ID: DP6177
Authors: Marcus Asplund
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
JEL Codes: L12; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| STM's pricing behavior (D49) | ENPV of profits (G35) |
| current pricing (D49) | future demand (J23) |
| future demand (J23) | long-term profit implications (L21) |
| estimated discount factor > 1 (H43) | STM's focus on maintaining customer stock (C69) |
| STM's pricing behavior (D49) | deviation from profit maximization (L21) |