Rivista Internazionale di Scienze Economiche e Commerciali Volume 38 (1991), N. 4, 355-368
           DECISIONS OF THE FIRM UNDER UNCERTAINTY: ESTIMATION AND STRUCTURE OF PRICE-COST MARGINS
                                                                                    by
T.V.S. Ramamohan Rao *, Saraswati P. Singh **, Prem P. Talwar ** I. Introduction
     Observed price cost margins vary across firms in a given industry as well as across different industry groups. The existing literature considers the structure of the market and the degree of competition generated by the inter-dependence of firms as the major explanation for these variations. Schmalensee (1988) contains a recent survey of this literature.
     It is often suggested that randomness of demand curves is endemic to firms in monopolistic competition. For, the demand curves of such firms are often influenced by the actions and reactions of rival firms (endogenous randomness) as well as by factors outside the market (exogenous variation which may also be random). However, as Hart (1985) and others argued, the managers of these firms usually find it expedient to adopt strategies which reduce the interdependence across firms rather than confront the endogenous randomness. If this line of argument is pursued to the logical limit the observed price-cost margin of any one firm is predominantly a result of expected market demand, its cost curve, and managerial objectives. The market structure itself takes a secondary role. Fraser (1985a, 1985b) and Rao (1986) examined the implications of this change of emphasis in some detail.
                   The prominent models in the literature tend to estimate reduced form equations describing ex post outcomes of the decision making process. As
     * Indian Institute of Technology, Kanpur (India).
     ** University of Alberta, Edmonton (Canada).
     The research was partly financed by the Indian Council of Social Science Research, New Delhi. We also appreciate the advice received from G.K. Shukla and D. Sharma. The authors accept responsibility for the contents herein.