Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 402: Variability and average profits - does Oi's result generalize?

Richard Friberg () and Kaj Martensen
Additional contact information
Richard Friberg: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Kaj Martensen: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: Average profits of a price taker are increasing in the variability of the output price (Oi, 1961). We show that, for the same reason, average profits of the price taker are increasing in the variability of the price of inputs. We proceed to establish that the same holds for a firm with a downward sloping demand curve. Unless the inverse demand curve of the firm with market power is very convex, the profit function of the price taker forms an upper limit for the convexity of profit (assuming constant curvature of costs).

Keywords: cost uncertainty; convexity of profit function

JEL-codes: D80

11 pages, September 14, 2000

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