Alternative Theories To Profit Maximization
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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, NGOs and NPOs 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 cant 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 PCs 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 doesnt 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 wont be able to negotiate better credit terms, better costs for its inputs of production, etc, which effectively make of this structure an impractical structure which is not widely followed (if followed at all).
One step away from perfect competition is monopolistic competition. This type of market structure has a number of different characteristics from the above. Which turn it into one of the most used market structures. In this scenario, companies are not all price takers and start making use of economies of scale in order to improve efficiency, reduce costs and increase profits. In the scenario companies sell a differentiated product at different prices. Like in perfect competition no barriers are put to entry and newcomers a constant threat to the market keeping every player always in search for a better mean to produce and compete.
An oligopoly, is when there are only a few number of companies that control a specific market. The barriers to entry can be both legal/political (ie. number of licenses awarded to cell phone operators) to the fact that the companies themselves create a “cartel like” attitude effectively brushing of the market new entrants through aggressive measures like undercutting pricing on new smaller entrants, controlling inputs for production, etc.
On the other end of the market structures are monopolies. Monopolies are generally quite inefficient in the sense that consumers dont have a choice in terms of what to consume and generally speaking dont offer good value for money as the company dictates the price of the good irrespective of cost (as we know companies are profit seekers and always want to maximize profit). I remember Portugal Telecom through its mobile phone network operator TMN, while it had the only license to operate in that industry had some of the highest rates of calls and rather inflexible services. Calls were billed per minute, apart from voice mail there were really not many services offered by TMN in the market.
When Telecel (Vodafone) was awarded the second license the new company offered a vast array of services and started per second billing creating a much higher sense of fairness in what people were billed for their phone calls. TMN followed suit. Prices though remained leveled. When Optimus was awarded a third license to operate, they came in with costs as low as 70 to 80% of TMN and Telecel, driving costs of calls down effectively benefiting further the consumer.
This goes to show that monopolies generally harm the consumer as either the consumer pays the price required or doesnt take the product at all. It is a more and more