DP3425 Monopoly Power and the Firm's Valuation: A Dynamic Analysis of Short versus Long-Term Policies

Author(s): Suleyman Basak, Anna Pavlova
Publication Date: June 2002
Keyword(s): asset pricing theory, general equilibrium, monopoly, short-sighted, time-consistency
JEL(s): D42, D51, D92, E20, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3425

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.