Journal Article Monopolistic Competition in a Large Economy with Differentiated Commodities Get access Oliver D. Hart Oliver D. Hart Churchill College, Cambridge Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 46, Issue 1, January 1979, Pages 1–30, https://doi.org/10.2307/2297169 Published: 01 January 1979 Article history Received: 01 February 1977 Accepted: 01 December 1977 Published: 01 January 1979

In an economy with complete markets, the owners of a firm will unanimously desire the firm to maximize profits if it is a perfect competitor. We generalize this result to an economy with incomplete markets. We show that if competitive conditions prevail-that is, if each firm is negligible relative to the aggregate economy-a firm's shareholders will want the firm to maximize the (net) market value of its shares. This result holds whether or not the so-called spanning condition is satisfied. However, while there may be agreement about what goal the firm should pursue, there may be disagreement among shareholders about how best to pursue this goal.

[In an economy with incomplete markets, firms' profits at different dates and contingencies cannot be aggregated into a single index and so profit maximization is not well-defined. In this paper we propose an objective for firms to pursue which is a generalization of the idea of profit maximization. We show that, if firms' managers can transfer current income between shareholders at the first date, and if shareholders have what we call competitive perceptions concerning the effect of a change in production plan on share prices, then each firm will maximize a weighted sum of shareholders' private valuations of the firm's production plan, where the weights are the initial shareholdings. We then define, and prove the existence of, a competitive equilibrium in which firms pursue this proposed objective. Finally, we analyze the optimality properties of the competitive equilibrium.]