Non-linear revenue evaluation

Dickson, Alex and MacKenzie, Ian A. and Sekeris, Petros G. (2022) Non-linear revenue evaluation. Scottish Journal of Political Economy, 69 (5). pp. 487-505. ISSN 0036-9292 (https://doi.org/10.1111/sjpe.12303)

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Abstract

In this article we investigate different market structures where decision makers are incentivized by both profit and revenue. Our innovation is that we consider managers that evaluate revenue in a non-linear way, exhibiting diminishing marginal utility. This implies that incremental changes in revenue-for example due to demand shocks-generate production choices that depend on the existing revenue base of the firm. We show that this intuitively appealing extension reverses some conventional results: decision makers may increase output in the presence of negative demand shocks, which depends on the concavity of their utility function with respect to revenue.

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