Why you shouldn't be a Maximizer of your Profit if you are greedy
Published by Michael Greinecker on Thursday, March 27, 2008 at 15:33A standard justification for the assumption that firms maximize profits is that firms who maximize profits do better and eventually dominate the scene. But there is a beautiful paper by Heifetz, Shannon and Spiegel, What to maximize if you must, that explains why being a profit maximizer is almost never optimal in terms of profit.
The paper is quite technical, but the central argument is quite simple: Suppose there are two players playing a game with continuous strategies, their payoff functions are differentiable and interior. At least locally, there exists only one equilibrium. Now suppose one player deviates very slightly from profit maximization. Now her marginal effect on her profits is zero- she is at a maximum. But the influence on the other players profit is usually not zero (this usually not is what makes the paper technical). So a marginal derivation from profit maximization will lead to a stronger effect on your opponents play. The argument is basically similar to the good old envelope theorem (not a fancy new one.).
I'll come out and admit it... I can't read that paper.
That being said, it seems that there's some word play at work in your post at least... if some action does not maximize profit, it's not profit maximizing, no?
No. Not being a payoff maximizer may influence how others treat you in equilibrium and therefore increase your payoffs.
Let´s give a simple example. We know that with Stackelberg competition, the first mover gets a higher profit than in Cournot competition. The reason is that the first mover can commit to producing more output. The same holds true if we have Cournot competition but one player has payoffs that lead him to producing more than in the Cournot case. It could be because a manager wants to be head of a large firm more than maximizing profits. And in that case, the firm profits from this.
I think I understand. Thanks!