Monopoly Power and the Firm's Valuation: A Dynamic Analysis of Short Versus Long-Term Policies

35 Pages Posted: 13 Aug 2002

See all articles by Anna Pavlova

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2002

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: Monopoly, asset pricing theory, general equilibrium, short-sighted, time-consistency

JEL Classification: D42, D51, D92, E20, G12

Suggested Citation

Pavlova, Anna and Basak, Suleyman, Monopoly Power and the Firm's Valuation: A Dynamic Analysis of Short Versus Long-Term Policies (June 2002). CEPR Discussion Paper No. 3425. Available at SSRN: https://ssrn.com/abstract=323360

Anna Pavlova

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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