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A Model of Market Power, Valuation and the Firm's Returns

Stavros B. Thomadakis
The Bell Journal of Economics
Vol. 7, No. 1 (Spring, 1976), pp. 150-162
Published by: RAND Corporation
DOI: 10.2307/3003194
Stable URL: http://www.jstor.org/stable/3003194
Page Count: 13
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
A Model of Market Power, Valuation and the Firm's Returns
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Abstract

This paper presents a model in which risk is admitted through random behavior of the firm's demand and cost functions. In a single-period context the effects of monopoly power are analyzed with respect to optimal output and valuation of the firm, as well as relative to the firm's level of systematic risk as exhibited in its market returns. In a multiperiod context the results are extended to an infinite horizon and a closed-form valuation expression is derived. Risk in the firm's future investment opportunities is shown to affect both the firm's valuation and changes in such valuation over time. The impact of this type of "growth" risk is directly linked to the firm's ability to obtain monopoly rents in its product market.

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