Profit Maximisation vs. Revenue Maximisation

One topic I have found quite interesting in the economics A Level syllabus so far is the topic of business objectives. Businesses have two main goals: revenue maximisation and profit maximisation. Revenue maximisation is when a business employs strategies to increase its sales to the highest attainable level. Profit maximisation refers to activities involved in the company’s effort to boost net profit to the highest possible degree given the firm’s available resources. Different roles within a firm focus on either profit or revenue maximisation.

The primary responsibility of a marketing or sales manager is to achieve sales targets over a given time period. In addition to achieving sales targets, a sales manager is expected to maximise sales to provide growth for the business and increase its profit margins. Profit maximisation is a task that is pursued by the general manager or CEO. That person is the one who is in control of all aspects of business operations. He must plan, organise, direct and control all business resources to earn the highest attainable net profit in order for the firm to not become insolvent.

I partially agree with the idea that revenue maximisation is a more realistic and achievable business objective than profit maximisation. To achieve revenue maximisation, a business must concentrate solely on revenue transactions and this can be accomplished by employing various sales strategies and programs. Profit maximisation entails a more complex program of business plans and activities that does not concentrate on sales alone. It encompasses both revenue and expenditure. A business manager must increase revenues, decrease costs or do both to increase net profit. However, it can be argued that profit maximisation in the long run is essential for a business to stay afloat.

On the other hand, when looking at a business’ objectives in the short run, their number one priority would be revenue maximisation. Revenue is the total number of sales being made a business. By maximising this, a business would be able to grow a larger customer base, which would consequently lead to the firm obtaining a larger market share. This would be beneficial to the business when their main goal becomes profit maximisation, as having a strong share of the market makes it easier to increase prices or reduce expenditure (in order to increase profit margins).

For example, a firm which has a large market share would be able to get good deals from suppliers and would therefore be able to use economies of scales to produce more for a lower price. This therefore reduces expenditure and also means the firm can increase revenues as they have a higher level of production, there being able to maximise profits. However, this depends upon the type of business. A small business with minimal financial investments might struggle to sustain their business activities without healthy profits. Furthermore, a business with many shareholders may also put focus on profit maximisation in order to provide large dividends for them.

Would the microchips industry benefit from an oligopical market structure?

Anti competitive behaviour is when a firm or group of firms may engage in order to restrict inter-firm competition to maintain or increase their relative market position and profits without having to provide goods and services at a lower cost or of a higher quality. I recently read in an FT article that there have been anti-monopoly investigations into the microchips industry due to allegations of price-fixing by South Korea’s Samsung, SK Hynix and US-based Micron Technology. These three firms control about 95% of the global market for dynamic random-access memory chips. This oligopical market structure means these firms cannot act independently and need to work interdependently. But to what extent is the microchip industry best suited to have an oligopical market structure, from a consumer’s perspective?

Firstly, with only a few businesses offering products or services, it will be easy for consumers to compare and choose the best option for their needs. In other types of market, it can be very challenging to thoroughly look into all the things offered by a huge group of companies and then compare prices. However, a problem that can arise from this is if the firms dominating begin to collude and choose to produce very similar products with little investment into research and development to save costs. Generally, companies in oligopolies become very settled with their ventures, as their operations and profits are guaranteed. This means that they would no longer feel the necessity to create new innovative ideas. This means products can be produced with low quality and there may be no variety at all in the market for microchips, which is bad for consumers with different needs and wants.

On the other hand, an advantage for consumers of the microchips industry operating under an oligopical market structure is that the prices in an oligopoly are stable. Changing the price of their microchips can have potential risks for a firm, whether it be lowering or raising the price. If a firm decides to lower the price of their microchips, although in the short term they will see an expansion in demand due to customers being willing to buy more of their products, this is not permanent and they could potentially lose their market share in the long term. Therefore keeping their prices stable is a rational strategy for the three dominating firms in the microchip industry. This is beneficial to consumers, as they do not need to change their budgets in response to changes in the price of these goods. 

Alternatively, it can be argued that these 3 firms may collude closely and act as a monopoly. This is a disadvantage for consumers as these 3 firms will have high price setting powers and therefore it is possible for there to be high fixed prices. Although in this oligopical market it is possible for competitive prices to occur, where firms compete to provide the lowest price of microchips for consumers, they are rarely very far apart from any other company that they could compete with. This is because the businesses and corporations that are part of the market agree to fix prices. This means there is a set limit for just how low prices can go, forcing consumers to pay high prices no matter what. Furthermore, these firms may decide to maximise supernormal profits and this could result in prices rising drastically, which negatively affects consumers.