Non‐linear revenue evaluation. (27th October 2021)

• Record Type: Journal Article
• Authors: Dickson, Alex; MacKenzie, Ian A.; Sekeris, Petros G.
• Is Part Of: Scottish journal of political economy. Volume 69:Number 5(2022)
• Page Start: 487
• Page End: 505
• Publication Date: 2021-10-27
• Subjects: delegation -- non‐profit maximization -- oligopoly; Great Britain -- Economic conditions -- 1945-1964 -- Periodicals; Great Britain -- Economic conditions -- 1964-1979 -- Periodicals; Great Britain -- Economic conditions -- 1979-1997 -- Periodicals; 330.9411005
• DOI: 10.1111/sjpe.12303
• Languages: English
• ISSNs: 0036-9292

Abstract

Abstract: In this article, we investigate different market structures where decision makers are incentivized by both profit and revenue. Our innovation is that we consider managers that evaluate revenue in a non‐linear way, exhibiting diminishing marginal utility. This implies that incremental changes in revenue—for example, due to demand shocks—generate production choices that depend on the existing revenue base of the firm. We show that this intuitively appealing extension reverses some conventional results: decision makers may increase output in the presence of negative demand shocks, which depends on the concavity of their utility function with respect to revenue.