[Microeconomics] Objectives of a firm

Traditional Objective
- Profit Maximization (MC=MR)

Alternative Objectives

1. To maximize revenue (MR=0)
- Managers and commission-based employees may choose to maximize the firm's total revenue in the short run, as their income is dependent on the total revenue of the firm.
- The manager will then increase the production of [product] up to the output level where MR=0.
- On Figure 1 below, the firm produces a greater output level at Qrm when they revenue maximize and as such, they set a lower price Prm as compared to the profit maximizing quantity of Qpm and price Ppm.

[Figure 1: Supernormal profits market structure diagram. At the spot where MR touches the x-axis, label Qrm. Label Ppm, Cpm, Prm, Crm.]

2. To maximize growth
- The firm may also have the incentive to pursue growth maximization in order to uphold the image of the firm and status of the manager.
- This can be done through internal expansion or merger.
- Managers will have a greater chance of getting promoted in a large firm as new posts are made available, hence they have the incentive to maximize growth.
- In the short run, the firm may choose to pursue growth maximization and would be able to pursue profit maximization in the long run, given the decreased average cost of production.

Positive side-effect of GM: Reap iEOS. But this is NOT the purpose of GM.

3. Gain market dominance
- Driving other firms out of the industry by increasing their market share.
- They can adopt predatory pricing, where they set the price of their products below MC of production.
- Through this method, the firm will undercut the price of products from other firms.
- When price decreases, it will decrease the quantity demanded for products by other firms. This causes P and Q to fall. This goes on until P<AVC for the other firms, causing them to shut down and be driven out of the market.
- The [said large firm] can deal with losses with the short run. After its competitors are driven out the market, they can increase the price of their products.
- Their SR losses can be compensated with their long run profits.
- The exit of other firms will allow the firm to increase their market share and correspondingly, their market power.

4. Entry deterrence
- Emphasize on pricing and non-pricing decisions to deter the entry of new firms and avoid losing market share to new entrants.
- They can engage in extensive product development/branding so as to differentiate its products from that of potential entrants. This makes the demand of the good more price inelastic.
- This increases the market power of the firm, giving it the ability to restrict output to set price.
- It can increase the price of its product to increase revenue, allowing the firm to raise its profitability in the long run.
- Considering that product development and branding have high costs, the long run profits will help to offset these temporary losses.

5. Profit Satisficing 
- Produce at a set level of output, even if it hasn't reached profit-maximizing level of output.
- The decision makers, who are the regional managers, can choose to achieve a given level of profits as set by the shareholders. This allows them to enjoy additional benefits of having shorter operating hours and lower levels of stress.
- This is because managers do not have the incentive to profit-maximize as they do not reap the benefits of the firm producing at the profit-maximizing level of output.