Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Display:
Time for a new theory of the firm    Cameron K. Murray   (H/T Steve Keen)

By making the theoretical objective of firms flexible and consistent with observation they are able to relax ridiculous requirements such as "free entry and exit and perfect knowledge of the future" and get realistic results.

We - myself and co-author Brendan Markey-Towler - have released a working paper outlining a new theory of return-seeking firms. And to our surprise, what seems a rather minor change in the firm's objective function leads to a variety of results consistent with the empirical record, and with many alternative theories of firm production and pricing (such as mark-up pricing).

What did we do?

First, we relaxed the assumptions about market conditions. Rather than the unrealistic free entry and exit and perfect knowledge of the future which define most models, in our world firms face uncertainty, have irreversible costs, and can delay investment to future time periods. As per real options theory, these conditions give rise to our firm objective of return maximisation.

Next, we allow competition to enter the model via the shape of the firm-specific demand curve. The firm specific demand curve can be specified to include the supply of other firms producing substitute goods, and the parameters of the curve can be varied to reflect differing intensity of competitive pressures.

We do this because the usual model condenses similar products into a single market, yet there are almost no examples of markets where the goods produced by different firms are perfectly interchangeable. Hence, competition is a process of return-seeking between firms competing in close substitute goods. This conception of competition also predicts non-price competition which aims to reduce the price sensitivity of customers, such as loyalty schemes and other incentives, and of course, product differentiation.

Because of the way market competition is conceived in our new model, there is no need for the arbitrary conceptual leap between a downward-sloping market demand curve, and a horizontal curve faced by a firm in a competitive market. All firms operate in their own markets, whose demand schedule is influenced by the offerings in substitute markets.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 21st, 2014 at 07:36:13 PM EST
Nothing about that represents any conceptual leap beyond what every reasonably clever neoclassical has been doing for decades.

Maybe the mathematics is a little more elegant, but it's still the same old bounded optimization logic under all the new paint.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 22nd, 2014 at 01:34:25 PM EST
[ Parent ]
Dropping some of the ridiculous assumptions and treating the firm in a way that is recognizable to anyone that has practical experience in business, especially if at least discussed in early economics courses, might start to make the discipline more relevant to other departments. So much of what makes it into blogs and media seems to show economists adopting an attitude of "look how ridiculous and off-putting we can be!" This is likely part of why so many business schools only require one intro economics course.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 22nd, 2014 at 05:40:36 PM EST
[ Parent ]
Dropping some of the ridiculous assumptions and treating the firm in a way that is recognizable to anyone that has practical experience in business, especially if at least discussed in early economics courses, might start to make the discipline more relevant to other departments.

You say that as if it were a good thing.

Economics departments need to learn from the real social sciences. Not the other way around.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 22nd, 2014 at 05:42:32 PM EST
[ Parent ]
You say that as if it were a good thing.

While having other academic curricula not require significant course work in economics might not, unfortunately, affect the baleful influence the current Mainstream version of Economics has on public policy it could lead to a collapse of the discipline in the academy. In comparison to the effect the entrenchment of current version of economics is having on societies the destruction of the discipline might well be an improvement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 22nd, 2014 at 07:33:51 PM EST
[ Parent ]
But departments who become motivated to include economics course because they [treat] the firm in a way that is recognizable to anyone that has practical experience in business, are unlikely to recognize and point out that the entire treatment is a nonsense from the ground up which has merely been tortured long enough to form some pale reflection of the real thing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jan 23rd, 2014 at 02:27:51 PM EST
[ Parent ]
The entire, US business school model is based on teaching versions of business and markets that have no basis in reality.  They're almost as bad as law schools.
by rifek on Thu Jan 30th, 2014 at 12:22:30 PM EST
[ Parent ]
Or rather, "might start to make the discipline seem more relevant to other departments", since the change required to make the discipline actually more relevant to other departments is to convert to a scientific approach, in which the effort being made is to explain cause and effect relationships in the real world, as opposed to trying to simple emulate real world outcomes.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jan 28th, 2014 at 11:46:21 AM EST
[ Parent ]

Display:

Top Diaries

Occasional Series