Utility Theory, Value Maximization and the Quality Decision under Uncertainty

The quality decision of the competitive firm under uncertainty is analyzed using 2 well-known valuation frameworks: 1. the expected utility model, and 2. the capital asset pricing model (CAPM). Because product quality is an important control variable, Sandmo's (1971) models are expanded to incl...

Full description

Saved in:
Bibliographic Details
Published in:International economic review (Philadelphia) 1984-06, Vol.25 (2), p.369-377
Main Authors: Brick, Ivan E., Jagpal, Harsharanjeet S.
Format: Article
Language:English
Subjects:
Bricks
Capital asset pricing models
Capital assets
Competitive firms
Cost functions
Economic uncertainty
Economic value
Expected utility
Investment risk
Market prices
Pricing
Risk aversion
Utility models
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The quality decision of the competitive firm under uncertainty is analyzed using 2 well-known valuation frameworks: 1. the expected utility model, and 2. the capital asset pricing model (CAPM). Because product quality is an important control variable, Sandmo's (1971) models are expanded to include price, output, and quality. It is shown that: 1. For the competitive firm, the introduction of risk affects policy in the same way as an increase in risk aversion, regardless of the valuation framework. 2. The comparative statics properties of the model for general parameter shifts differ for the expected utility and CAPM frameworks. In particular, the latter results have a clear economic interpretation regardless of the type of uncertainty, while the expected utility results are well-defined only if uncertainty is exogenous.
ISSN:0020-6598
1468-2354
DOI:10.2307/2526202