Capacity and Market Structure
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 fulfillment of the standards of profitability. It is also seen that the usual interpretation of the present-value integral is to be abandoned in favor of another which, on a formal level, has close ties with the theory of integration over the space of random functions.
- DOI
- 10.1086/259726
- Volume
- 79 (1)
- Pages
- 97-113
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref