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- Title
A MODEL OF THE EFFECT OF CONGLOMERATION AND RISK AVERSION ON PRICING .
- Authors
Bradburd, Ralph M.
- Abstract
Although conglomerate firms have been the focus of considerable academic discussion and even antitrust activity, there is still wide disagreement over the nature and even the existence of behavioral changes resulting from conglomeration. The disagreement sterns in large part from differences in the assumptions and approaches of the economists who have argued this issue. The model developed below examines the effect of conglomeration on the firm's optimal product price when management is risk averse and the firm faces uncertain demand. In modeling pricing policy under uncertainty, the managerial attitude toward risk will be a crucial determinant of behavior. They will assume that managerial risk aversion is constant over the relevant decision range that is, for the type and range of decisions being considered, management will require a fixed increase in expected profit for every unit increase in the variance of dollar profits. Like the single-product firm, the conglomerate management attempts to maximize the expected utility of the firm's income. Their goal in this paper is to compare the expected utility maximizing price that would be set by a single-product firm to that which would be set by a conglomerate subsidiary.
- Subjects
CONGLOMERATE corporations; MERGERS &; acquisitions; RISK management in business; MANAGEMENT; PRICING; ECONOMISTS; PROFIT
- Publication
Journal of Industrial Economics, 1980, Vol 28, Issue 4, p369
- ISSN
0022-1821
- Publication type
Article
- DOI
10.2307/2098068