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Profit‐Rate Maximization in Interdependent Markets: A Research Note
Author(s) -
Sheppard Eric,
Plummer Paul S.,
Haining Robert P.
Publication year - 1998
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/0022-4146.00115
Subject(s) - monopolistic competition , profit maximization , microeconomics , homogeneous , economics , maximization , profit (economics) , interdependence , industrial organization , monopoly , mathematics , combinatorics , political science , law
In the theory of the firm it is conventional to regard firms as (total)profit‐maximizing institutions. In this paper it is shown that the interdependence among firms that is characteristic of monopolistic competition makes it plausible for them also to choose to maximize the rate of profit on capital advanced. For a homogeneous product with inelastic total demand, such as gasoline retailing, firms acting as rational agents, facing fixed costs in a homogeneous spatial market, and choosing to set prices under rate of profit‐maximization can achieve higher total profits than firms operating under total profit‐maximizing objectives.