Do Business Firms Maximize Profits?
Chapter 6: “What Do Firms Try to Maximize, if Anything?”
Introduction
Do firms really maximize profit? This question has been under debate since the 1940s and 1950s, when a wide number of mainstream neoclassical economists defended the assumption against a group of institutional economists that questioned the assumption as the norm in the industry. On the side of the neoclassical economists were Fritz Machlup and Milton Friedman, with institutional economists Richard A. Lester and Garnder C. Means opposing them. While the debate remains largely unsettled, the fact remains that in practically all economic textbooks, the assumption of profit maximization remains prominent.
More recently, Fanny Demers and Michel Demers, two associate professors of economics at Carleton University renewed the debate with Mark Lavoie, a professor of economics at the University of Ottawa.
Profit Maximization and Other Goals of the Firm
Fanny Demers and Michel Demers argue that whether firms maximize profits is controversial, and dependent on several important factors. The market structure under which the firm operates, the form of business ownership, and level of certainty and information all affect whether or not a firm will seek to maximize profit.
Market Structure and Nature of Competition
The market structure under which the firm operates is very important when analyzing profit maximization. Perfect competition occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there is no impediment to the entry or exit of firms, and when full information is available.1 Under such a market system, when competitive pressures are very intense, a firm is likely to pursue profit maximization, as market forces will push firms that do not into bankruptcy.
However, in imperfectly competitive markets, such as monopolistic competition, monopoly, and oligopoly, other goals that are not profit maximization may be pursued.
Introduction
Do firms really maximize profit? This question has been under debate since the 1940s and 1950s, when a wide number of mainstream neoclassical economists defended the assumption against a group of institutional economists that questioned the assumption as the norm in the industry. On the side of the neoclassical economists were Fritz Machlup and Milton Friedman, with institutional economists Richard A. Lester and Garnder C. Means opposing them. While the debate remains largely unsettled, the fact remains that in practically all economic textbooks, the assumption of profit maximization remains prominent.
More recently, Fanny Demers and Michel Demers, two associate professors of economics at Carleton University renewed the debate with Mark Lavoie, a professor of economics at the University of Ottawa.
Profit Maximization and Other Goals of the Firm
Fanny Demers and Michel Demers argue that whether firms maximize profits is controversial, and dependent on several important factors. The market structure under which the firm operates, the form of business ownership, and level of certainty and information all affect whether or not a firm will seek to maximize profit.
Market Structure and Nature of Competition
The market structure under which the firm operates is very important when analyzing profit maximization. Perfect competition occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there is no impediment to the entry or exit of firms, and when full information is available.1 Under such a market system, when competitive pressures are very intense, a firm is likely to pursue profit maximization, as market forces will push firms that do not into bankruptcy.
However, in imperfectly competitive markets, such as monopolistic competition, monopoly, and oligopoly, other goals that are not profit maximization may be pursued.