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A biextremal principle for a behavioral theory of the firm
Journal article   Open access

A biextremal principle for a behavioral theory of the firm

Kenneth O. Kortanek and Ralph W. Pfouts
Mathematical modelling, Vol.3(6), pp.573-590
1982
DOI: 10.1016/0270-0255(82)90035-5
url
https://doi.org/10.1016/0270-0255(82)90035-5View
Published (Version of record) Open Access

Abstract

The behavioral postulates of the approach are (i) firms do not know their demand functions, (ii) firms price according to average cost plus markup, and (iii) firms satisfice in the sense that a firm will not seek a higher return if its per unit return exceeds the average cost plus the minimum markup. By a behavioral equilibrium we mean the existence of price and quantity vectors such that at these prices demand equals supply and also that price equal markup costs plus possibly a nonnegative spread vector. We formulate a biextremal principle for a behavioral equilibrium under two basic assumptions: (A1) demand is obtained from a strictly concave potential function of all prices, and (A2) each firm's average cost function is increasing. The saddle function consists of consumer surplus plus a new variation of producer's surplus, termed producer's satisficing surplus, where now the integral of marginal cost is replaced by the integral of markup cost. Any saddle point is a behavioral equilibrium, and we show that the biextremal principle is equivalent to a dual pair of uniextremal principles governed basically by price variables and quantity variables, respectively. We offer a new behavioral interpretation by showing (a) in the market demand (price) problem one minimizes the sum of consumer surplus and producers' markup surplus, and (b) in the producers' (quantity) problem one maximizes the sum of consumer surplus and the producers' satisficing surplus.

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