Alternative Theories to Profit Maximization

Alternative theories to profit maximization ranging from perfect competition to strict monopolies.

Companies and The Market

Most companies are profit oriented. Companies survive and live on profit. Even governmental institutions, NGO’s and NPO’s are profit oriented, what they do with profit is different though. Saying this means that companies seek always to be at a position where profit is maximized. As we know by now this happens when MC=MR but this is an always changing point as supply and demand are dynamic, effectively meaning that if firms get it right once they can’t just do the same eternally, they still need to adapt to every market factor as a new change is a new reality all together that needs to be studied and addressed. All of these changes happen in what is called the market, where suppliers and consumers meet to reach a level that suits the interests of both parties involved.

Markets have four different structures which need different “attitudes” from the suppliers in order to enter, compete and effectively gain share in the market. When competing, one can be in a perfect competition, in a monopolistic competition an oligopoly or a monopoly [1]. Each of these structures ensures different situations in regards to competition from a perfect competition where firms compete all being equal in terms of threats and opportunities, in terms of the homogeneity of the products sold, ensuring that every competitor has the same chance to get a share of the market, to the other end of the scale where we have monopolies whereby one company alone dominates the whole market not allowing any other company to enter the market selling the product (or service) at its price.

In all of these we are also considering that there are no “market distortions” as I tend to call them which are very common in developing (or third world) countries in a very blatant way, and less common and much more hidden in developed countries. These are the issues with fraud and corruption which I face a lot in Angola and see that Africa, Asia and South America is ridden with it, but also see it in developed countries it happens creating market distortions which affect whatever market structure you are in. If you are in a monopolistic competition market and corruption is very high, it may turn out that the market structure you are in is only perceived as monopolistic competition as only the companies who engage in that practice will effectively secure (typically large) business will be in such reduced numbers that it can be defined as a oligopoly or even a monopoly.

Fraud like tax fraud is also a distortion that affects your competitiveness and ultimately may dictate whether your perceived oligopoly can become a monopoly or a monopolistic competition. For example if you sell PC’s and so does a company that competes with you, and eventually a third firm comes on board that is considerably cheaper, while initially the market was an oligopoly it could remain an oligopoly because 3 is still a small number of companies selling this product. But consider that your competitor doesn’t pay taxes on goods he imports. This would effectively allow him to undercut your prices while still making a profit. Surely this would drive the other companies out of business or severely impact its sales turning the market into a near monopolistic market for example.

Market Structures

One of extremes is perfect competition. Is this scenario, every company is a price taker. No company is big enough to actually force the market prices and the market would be highly competitive with all the stakeholders involved, highly informed of the situation at all points, both the supplier and consumer side. Most companies would be quite small not making use of economies of scale, traducing in a way in not the most efficient and effective model when it comes to give the consumer “best value for money”. Even though competition is fierce because each individual company is small they won’t be able to negotiate better credit terms, better costs for its inputs of production, etc,