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A Class of Behavioral Models for the Profit-Maximizing Firm

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  • Philippe Choné
  • Laurent Linnemer

Abstract

We study the behavior of a firm that consistently maximizes a misspecified profit function. We provide an equilibrium concept where the misspecification error remains undetected. We examine the uniqueness and stability of the equilibria. The model of the price-taking firm belongs to this class. In one of these models, the cost-taking firm, the equilibrium price increases with fixed costs. The behavioural price can be lower or higher than the rational price, meaning consumers can benefit from the lack of rationality. Finally in a long-run perspective where the cost is endogenous, we show that the behavioral and rational firms end with the same level of output.

Suggested Citation

  • Philippe Choné & Laurent Linnemer, 2022. "A Class of Behavioral Models for the Profit-Maximizing Firm," CESifo Working Paper Series 9718, CESifo.
    • Handle: RePEc:ces:ceswps:_9718
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    References listed on IDEAS

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    More about this item

    Keywords

    behavioural model of a firm; misspecified profit function; fixed costs;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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