why representative firm level thinking is so dangerous a generalization
interfu-idiot randy w
set me off
with his league of magic trick assumptions
“firms under monopolistic competition with increasing marginal costs”
assume increasing marginal costs ??
is this the magic trick here?
what if its almost never the case particularly in a demand squeeze
what if demand constrained firms always face declining or at least level variable costs and thus
your operating at capacity needs to go poof
and this ??
” Holding symmetrical and constant the shape of the distribution of sales conditional on price, adjusting prices downward increases the mass of the profit distribution inside the bankruptcy regime. It is unrealistic to hold the shape of that distribution constant, but even allowing for plausible variation (the distribution of sales narrows around a mean of zero as price increases), at the margin the effect of leverage is to reduce price adjustment, prevent the price from reaching the price an unlevered firm would set.”
strikes me as a very intense tap dance
unpack it dear sir
in particular
“adjusting prices downward increases the mass of the profit distribution inside the bankruptcy regime”
not for sure if sales increase
ie violate ..and why not..your stricture :
“Holding symmetrical and constant the shape of the distribution of sales conditional on price”
and with unit sales flex capacity
we get both q and p movements at the firm level
and alas ambiguity as to firm level revenue change eh ??
first off the line price cut marketers often gain share here …no ??
--------------------
“the effect of leverage is to reduce price adjustment, prevent the price from reaching the price an unlevered firm would set.”
this key insight and by itseelf worth a post
runs aground for equally keen reasons you nicely sight
the competitive advantage of maximal leverage
sunk cost are to be fogotten in operation eh
and fixed costs have this added sunk like dynamic aspect you can’t liquidate em
especial in market contraction conditions
best practice utilize all fixed factors
but the incubus of debt used to buy and build these fixed factors
cripples the marginal pricing option
ie dramatic price cuts
by spoiling the market for other participants
as well as unsettling your creditors and holders of your trade receivables
that have other firms in their payment stream that will face dramatic unit sales drops if they don’t respond
the flabalanche of weak participants into payment problems quickly insues
btw
the burden of more and more arbitrary assumptions
build as you thicken your one firm decider scenario towards
market like complexity
btw have you ever run a firm thru these sorts of tempest ??
assume increasing marginal costs ??
is this the magic trick here?
what if its almost never the case particularly in a demand squeeze
what if demand constrained firms always face declining or at least level variable costs and thus
your operating at capacity needs to go poof
and this ??
” Holding symmetrical and constant the shape of the distribution of sales conditional on price, adjusting prices downward increases the mass of the profit distribution inside the bankruptcy regime. It is unrealistic to hold the shape of that distribution constant, but even allowing for plausible variation (the distribution of sales narrows around a mean of zero as price increases), at the margin the effect of leverage is to reduce price adjustment, prevent the price from reaching the price an unlevered firm would set.”
strikes me as a very intense tap dance
unpack it dear sir
in particular
“adjusting prices downward increases the mass of the profit distribution inside the bankruptcy regime”
not for sure if sales increase
ie violate ..and why not..your stricture :
“Holding symmetrical and constant the shape of the distribution of sales conditional on price”
and with unit sales flex capacity
we get both q and p movements at the firm level
and alas ambiguity as to firm level revenue change eh ??
first off the line price cut marketers often gain share here …no ??
--------------------
“the effect of leverage is to reduce price adjustment, prevent the price from reaching the price an unlevered firm would set.”
this key insight and by itseelf worth a post
runs aground for equally keen reasons you nicely sight
the competitive advantage of maximal leverage
sunk cost are to be fogotten in operation eh
and fixed costs have this added sunk like dynamic aspect you can’t liquidate em
especial in market contraction conditions
best practice utilize all fixed factors
but the incubus of debt used to buy and build these fixed factors
cripples the marginal pricing option
ie dramatic price cuts
by spoiling the market for other participants
as well as unsettling your creditors and holders of your trade receivables
that have other firms in their payment stream that will face dramatic unit sales drops if they don’t respond
the flabalanche of weak participants into payment problems quickly insues
btw
build as you thicken your one firm decider scenario towards
market like complexity
btw have you ever run a firm thru these sorts of tempest ??