Showing papers on "Profitability index published in 1971"

Profitability of Monopolization by Vertical Integration

Abstract: It is generally accepted by economists concerned with merger policy that a monopolist does not have a profit incentive for integrating forward into a competitive industry unless there are cost savings to be gained.' A representative statement of this proposition is as follows. A monopolist of input A, where input B and final product X are produced under purely competitive conditions, has no economic incentive to integrate forward into industry X (in the absence of cost savings of the type described above). The monopolist of A has the ability to extract all the potential profit from industry X by its choice of the price of input A. However, because the underlying theoretical model assumes fixed-proportions production in industry X, an important source of increased profit has been overlooked. Assume that variable-proportions production exists in industry X. Now, the monopolist, by monopolistic pricing, imposes a deadweight loss on industry X by inducing a distortion in factor utilization. In principle, industry X could always benefit by paying the monopolist a lump sum equal to his profit on the condition that it be allowed to buy at marginal cost. Industry X could then use the inputs efficiently and thereby increase its profit. Hence, the vertical merger permits the integrated firm to achieve efficiency in factor utilization and capture the additional profit. The point is shown graphically in figure 1. Suppose that in prenmerger equilibrium the competitive industry produces output X*. For simplicity, we represent he entire industry by isoquant X*. The ratio of the monopoly price of A to the price of B is given by the slope of PP*. The ratio of the marginal cost of A to the price of B is given by MM* (NN* is parallel to MM*). Measuring in units of B, the monop-

Foreign Competition and Domestic Industry Profitability

Abstract: R ECENT studies investigating the variability in inter-industry profit rates largely ignore the influence of actual and potential foreign competition [2, 5, 6, 15, 171. This paper examines the influence of foreign competition on industry profitability and concludes that such competition, as represented by the level of imports, appears to exert a significant and negative effect on industry profit rates. The evidence is consistent with the hypothesis that less restrictive trade policies encourage more competitive pricing behavior in domestic industries. Section I of this paper develops the analytical framework within which to view potential foreign competition. Section II describes the model and presents the major empirical results. Section III discusses the implications of the empirical results with respect to foreign trade policies.

Rational Management Responses to External Effects

Abstract: This paper is a discussion of the external or side effects of business and rational responses to these external effects for profit-maximizing firms.1 Some people would argue that the rational respo...

The location of the beet-sugar industry in England and Wales, 9 2-36

Abstract: The beet-sugar industry of England and Wales was established between 1912 and 1928. A general examina- tion of its locational pattern shows its links with the sugar-beet growing area, but a more detailed analysis reveals significant anomalies. Marginal factories are identified, and the reasons for their marginal locations are seen to be the policies of the companies responsible for developing the industry. The three principal companies (or groups) are shown to have different aims and different concepts of the most efficient plant size. Group ownership was reflected also in the nature of the output of each factory. While classical location theory suggests that beet-sugar factories have strong ties with sugar-beet growing areas, even in a raw material-oriented industry such as this, corporate policies and behavioural variables have played an important role in guiding the location of the processing plants. Two of the more important trends in the geography of manufacturing at the present time are the attempts to include behavioural variables in locational analysis and the increasing awareness of the significance of the geography of the firm or enterprise. H. A. Simon1 has shown the difficulty of using Economic Man in the analysis of real world situations, and J. Wolpert2 was among the first to attempt to analyse the spatial implications of decisions taken by men with limited ability and with less than perfect information. Although Wolpert was concerned principally with a farming community, he made the observation that 'there is little about the theoretical framework or approach used in (his) analysis which is not equally applicable to the decision process of the firm in manufacturing'.3 A. Pred4 developed this new approach to the study of manufacturing locations by expanding the ideas of E. M. Rawstron5 and D. M. Smith6. For any plant, Pred argues, there may be one or more optimum points and spatial profitability margins, and within these margins a plant may operate anywhere at some, but not maximum, profit. It is within these areas bounded by spatial profitability margins that behavioural variables play a major role in guiding locational patterns. Classical location theory is concerned primarily with the location of single plant firms, but R. B. McNee has shown in a series of articles7 that many decisions in manufacturing are taken by multi-plant concerns whose aims may differ quite markedly from those of the company operating only one factory. A more recent review of the geography of enterprise

High and Stable Concentration Levels, Profitability, and Public Policy: A Response

Abstract: INa recent note in this Journal,' Professor Yale Brozen takes to task Professor Donald Turner and the members of the White House Task Force on Antitrust Policy for accepting as an empirical observation the proposition that high and stable levels of industrial concentration are associated with persistently high levels of profitability. The issue is significant, since its implication that high and stable concentration levels would lead to the price, output, and resource allocation results associated with market monopoly led the Task Force to recommend an explicit public policy of deconcentration for major industries. Brozen reviews three studies from the literature, adding evidence of his own in each case, and argues that they fail to support the thesis. As economist members of the Task Force, we feel compelled to respond. We do not wish to argue that the available evidence is all one-sided, nor that it is as conclusive as would be desirable; nor that the relationships themselves are by any means invariant among firms, industries and time periods. However, we would specifically contend that the studies and data selected for analysis by Brozen, along with other studies available in the literature, support, rather than contradict, the proposition in question. Thus, we do not withdraw our support of the Task Force recommendations on the basis of the \"new evidence\" presented by Brozen. We might note at the outset that the attention accorded to concentration and profit data in Brozen's note suggests a certain evolution in his thinking.

Capacity and Market Structure

Abstract: The principal objective of this essay is to bring together the theory of a firm's capacity decisions and certain facts of market structure which contribute to the uncertainty about the prices or revenues realized by the firm. The connecting link between the two is furnished by the fact that, under conditions of "competition among a few," the output decisions of an individual firm have a random effect on its own revenues. It is shown that considerations of uncertainty influence the capacity or utilization decisions in a manner which is fundamentally different from that under "pure" competition. In the latter case, a production decision of an individual firm does not change the probability distribution of market prices. This and some related considerations make it practically useful to interpret "capacity" in terms of profitable output--allowing the standards of profitability to be quite arbitrary. Defined in terms of profitable output, capacity emerges as a random variable--random because of the uncertain ...

Cost Functions, Concentration, and Barriers to Entry in Twenty-Nine Manufacturing Industries of India: A Comment and Reinterpretation

Abstract: IN a recent issue of this journal, Vinod K. Gupta reported on the relationship between concentration and dominant firm profitability, and on the relationship between profitability and his estimate of the percentage of industry output required for minimum optimal plant size, for twenty-nine Indian manufacturing industries.' He found that there was a positive, but not statistically significant, correlation in each case. He attributes the failure to reject the null hypothesis to the fact 'that the accounting profit-rate data as given in the Census do not give us an estimate of the true 'theoretical' rate of profit' and that 'a very rigorous and sensitive method of calculating the "theoretical" rate of profit has got to be developed and used, in order to test this hypothesis.'2 Although this point is a possible explanation, this comment will argue that Gupta's findings are not unexpected in view of the way he chose to test the relationship between the structural variables and profitability. In fact, it will be shown that a different test, using Gupta's data, produces a positive and significant relationship between profit rates and entry barriers, which is consistent with evidence reported for United States industries.3 This reinterpretation of Gupta's data provides important confirmation of the influence of market structure on profitability, and suggests that firms which have market power price accordingly regardless of country.

Purchase Prices of Agricultural Products And the Planning of Accumulation

Abstract: The system for economic stimulation of the production and purchase of agricultural products, as formulated by the March (1965) Plenum of the Central Committee of the CPSU, is being successfully implemented. Improvements in the formation of prices of agricultural products must play an important part in implementing this system. However, purchase prices are still not free of a number of shortcomings that were pointed out at the October (1969) Plenum of the Central Committee. Considerable differentiation in profitability also continues to exist—both with respect to individual products and to overall production—between regions, republics and, all the more so, between collective farms. There is a substantial differentiation in the profitability of state farms that have been converted to a system of total economic accountability. Price improvements must be directed toward the solution of a twofold problem: the equalization of returns on the basis of a comprehensive consideration of objective production factors,...

A simulation analysis of cash flow attenuation under alternative financial operating structures

Abstract: This paper presents the results of a simulation analysis of the stochastic processes which determine cash flow attenuation under alternative financial operating structures. The environment of the study is that of a rapidly expanding retailing firm, which must consider a myriad of alternative operating structures during its embryonic development. Simulation is employed to determine risk-return profiles for the various alternatives. Efficiency frontiers are next computed for each of five measures of profitability, over a time adjusted horizon. An operating structure which produces minimal attenuation, and hence maximal profitability, is then determined by analyzing the efficiency frontiers of the various alternatives.

Optimization of equipment investment

Abstract: Maximization of the total present net worth of an investment in production equipment is studied. A model which gives rises to the optimum life as well as the optimum production rate is proposed and the optimal decisions are determined by the maximum principle. That there exists three typl'S of investment is a well known fact in the business world. These a,'e (1) investment with a net loss in all phases, (2) investment with loss at an initial period but with a net profit after that period, and (3) investment with a net profit from the beginning to a certain time. The proposed model can take this fact into account.

Towards a technology of social responsibility—I. Problems in the identification of acceptable net benefit-risk ratios

Abstract: In the planning of industrial enterprises, it is proposed that in addition to conventional profitability, economic risk and benefit-cost analyses, social and ecological risk also be determined. It is suggested that the intangible components of benefit-cost analysis be included in a qualitative net benefit determination, and that the project worth W be expressed as W=P−PaPr·Sb−ScSr·Eb−EcEr , where the first term represents acceptable profitability-risk ratios, the second, quantifiable secondary and higher order net benefit-risk ratios and the final term socio-ecological net benefit-risk ratios. An approach to appraisal of benefits, costs and risks associated with industrial projects is described.