Objectives of Firms
Idea
A firm is generally assumed to pursue profit maximisation, but it may instead pursue one of three alternative objectives. Which objective a firm holds determines the output it chooses and so the price, profit and market share that follow.
Mechanism
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Profit maximisation — produce where (MC rising). This is taken as the firm’s principal objective and the default against which the others are contrasted.
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Revenue maximisation — produce where , the output at which total revenue is greatest. A firm may favour this because managers’ salaries and standing often vary with sales revenue rather than profit. This output is larger, at a lower price, than the profit-maximising one.
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Market-share dominance — maximise output to capture market share, accepting lower profit by cutting price or spending on differentiation. Firms typically pursue this only in the short run, intending to raise prices back towards profit-maximising levels once enough share is secured.
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Profit satisficing — earn only enough profit to satisfy shareholders rather than the maximum. This arises from the separation of ownership and control: where managers, not owners, run the firm and their pay depends little on profit, they may pursue their own goals (sales, growth, an easier life) subject to keeping shareholders content.
Considerations
The departure from profit maximisation is usually traced to imperfect information or a principal–agent divergence: a firm may lack the cost and demand information needed to locate , or its managers (agents) may not act in the owners’ (principals’) interest. These supply ready evaluative points — an alternative objective is rational from the decision-maker’s standpoint even where it leaves the firm short of maximum profit.