Alternative objectives

1. In practice firms pursue a range of objectives, especially where ownership is divorced from control.
2. The main alternatives are survival, profit satisficing, sales maximisation and revenue maximisation.
3. The objective a firm chooses changes the price it sets and the output it produces.

Survival

1. Survival matters most for new firms and during a recession or an aggressive price war.
2. The firm accepts lower profit, or even short-run losses, in order to stay in the market.
3. Once it is established it may switch to a more ambitious objective.

Profit satisficing

1. Managers aim for a satisfactory level of profit rather than the maximum.
2. Enough profit is earned to keep shareholders content, leaving managers free to pursue other goals such as an easier life.
3. It arises from the divorce of ownership from control, since owners cannot fully monitor managers.

Sales maximisation

1. Sales maximisation is the largest output the firm can sell while still earning at least normal profit.
2. It occurs where average revenue = average cost, the break-even output.
3. Motives include gaining market share, exploiting economies of scale and rewarding managers whose pay is linked to firm size.

Revenue maximisation

1. Revenue maximisation is the output at which total revenue is greatest.
2. This occurs where marginal revenue = 0.
3. Baumol argued managers favour revenue because their salaries and status are tied to turnover.

Comparing the objectives

1. Profit maximisation gives the lowest output and highest price, where MC = MR.
2. Revenue maximisation sits further right, where marginal revenue = 0.
3. Sales maximisation sits further right still, where average revenue = average cost.

Do firms really abandon profit maximisation?

1. There is a strong case that many firms do pursue other goals, because in large companies ownership is divorced from control, and salaried managers whose pay and status track turnover or firm size have an incentive to maximise sales or revenue, or simply to satisfice once shareholders are kept content.
2. But no firm can ignore profit for long: persistent subnormal profit triggers falling share prices, the threat of takeover and difficulty raising finance, so many apparently non-profit goals are really profit maximisation over a longer horizon, as when sales maximisation now builds the market share that raises future profit.
3. Which objective dominates also depends on circumstances, with survival to the fore in a recession or price war, growth in a young firm, and profit maximisation where ownership is concentrated or owners can monitor managers closely.
4. On balance, firms pursue a mix of objectives rather than textbook profit maximisation at every moment, yet profit remains the binding long-run constraint; how far a firm departs from it depends on how contestable its market is, how closely owners can monitor managers, and the time horizon in view.

Does it matter if firms pursue objectives other than profit maximisation?

1. It can benefit consumers, at least in the short run, because sales or revenue maximisation set a lower price and a larger output than profit maximisation: in the worked example above output rises from 8 to 16 units and price falls from £12 to £4, so consumers gain lower prices, wider access and more choice, and satisficing reflects the real-world fact that salaried managers rather than owners control most large firms.
2. But pursuing these goals leaves less profit for investment and innovation, so dynamic efficiency and long-run product quality can suffer, and satisficing may simply reflect a principal-agent failure, with managers taking an easier life or empire-building at the owners' expense rather than passing any benefit on to consumers.
3. How much it matters depends on which objective is chosen and why: a lower price from sales or revenue maximisation helps consumers directly, whereas slack managerial satisficing largely wastes resources, and any consumer gain is mostly short-run because a firm that neglects profit for too long loses the finance that sustains future output.
4. On balance, non-profit objectives are neither automatically good nor bad for consumers; it depends on whether ownership is divorced from control, the time horizon in view (short-run lower prices against long-run investment), and market conditions such as how contestable the market is.