Revenue maximisation is a more realistic business objective than profit maximisation for many

businesses.
To what extent do you agree with this statement? Refer to an industry of your choice in your
answer.

- Diagram + brief explanation.

Profit Maximization occurs where marginal cost equals marginal revenue, at Pp and Qp, and is
assumed to be the Objectives of private businesses in a market economy. This is because
shareholders, who are the owners of the business, receive higher dividends which is very
important considering they are funding the enterprise.

On the other hand, revenue maximization occurs where marginal revenue equals zero, Pr and
Qr, with a lower price and higher quantity that profit maximization. Whereas profit
maximization is when firms operate where MC = MR.
 1) Dynamic efficiency

For a pharmaceutical industry, dynamic efficiency via profit maximization is essential. Dynamic
efficiency occurs when supernormal profit is being made in the long run. This profit can then be
reinvested back into the company in the form of R&D, allowing them to develop new more
effective drugs, supported by the most recent medical research. This is hugely beneficial for
consumers, who will receive newer drugs to better cure their diseases - perhaps be able to
purchase new types of medicine that do not yet exist. Prices could be lower over time if
technology advances reduce costs for the firm, which are then passed on to consumers. The
choice available to consumers in terms of variety of drugs would increase too.

For the firms, new product development can create monopoly power, especially if such
products are patentable increasing the profit making potential of a business over time. New
products can increase market share, crucial in a competitive industry where the only way to get
ahead of rivals is through innovation and R&D. Once more better technology can allow a firm to
reduce their costs of production and thus become more profitable over time.

(evaluation)

Although monopolists make long run supernormal profit, there is no guarantee this profit will
be used for re-investment and thus dynamic efficiency may not occur. The profit may be given
to shareholders in the form of dividends, it may be saved or used to deleverage (pay back
debts). This could be more likely than dynamic efficiency given that there is little competition to
incentivise investment. In any event, they profit maxmisiation is still the most realistic objective
for them, even if what drives them to maximise their profits is not to be dynamicly efficient.

2) Monopoly market nature of lack of competition allows them to charge higher prices and
make supernormal profit (profit maximize).

The pharmaceutical industry has high barriers to entry, which keep new firms out of the market,
therefore allowing pharmaceutical firms to keep charging high prices and continue operating at
the profit maxmising point (MC = MR), as there is no threat of creative destruction. There are a
lot of legal barriers in the pharmaceutical industry. This could include for example, patents
(copyrights to prevent new firms from copying incumbent firms products illegally), strict health,
and safety regulation, planning regulation, labour laws, environmental regulation and product
standards. The higher the legal barriers, the lower the incentives to enter the market for firms
where costs of production and uncertainty can be high. Also, there are high start-up costs in
terms of drug testing & research. These act as a deterrent for new firms entering a market
deciding instead to set up elsewhere where the initial risks are much lower. As a consequence,
fewer firms enter the pharmaceutical market and competition is restricted.
Unlike highly contestable (competitive) markets, such as perfectly competitive markets, firms in
the pharmaceutical industry, due to the high barriers to entry and hence lack of competition, do
not have to worry about creative destruction, which is an issue for firms in a perfectly
competitive market. This is where supernormal profits attract new and more efficient firms into
the industry, and these new firms drive out the less efficient incumbent firms who are unable to
compete.

However, In reality knowledge of marginal revenue and marginal cost may be imperfect
making it difficult for firms in the pharmaceutical industry to be profit maximisers. However
even if firms are not producing where marginal revenue equals marginal cost, the idea of profit
maximization will still hold even if they adopt a different strategy such as cost plus pricing,
where a price differential on top of the cost of production is used instead.

3) Situations where revenue maximization can be more realistic objective than profit
maximization

Revenue maximisation can be a more effective strategy for existing firms, to use predatory
pricing to drive out existing profit maximizing competition from the industry allowing a firm to
gain more market share and potentially develop a monopoly presence in the market over time.

Also, producing at a higher quantity than profit maximization allows a firm to experience
greater economies of scale, reducing average costs to then reduce prices and gain market share
ahead of rivals who do not benefit from the same economies of scale.

Moreover, revenue maximization might be a more realistic objective because the divorce
between ownership and control may make revenue maximization an objective pursued by
managers looking to maximize their benefits at work. Managers may be able to justify higher
salaries, large offices and other perks in the job using revenue figures, often a headline grabber,
as justification.

In reality, whether profit maximisation or revenue maximisation is the more realistic objective
depends mainly on the type of market within which the firm is operating. For a monopoly market
such as the pharmaceutical industry, profit maxmisation is in the best interest of the firm,
because of the high research costs requiring supernormal profits to be reinvested.

However it is important to also acknowledge that profit maximisation is not the objective of all
monopolists. Other objectives that promote the public interest such as sales maximisation,
allocative efficiency or corporate social responsibilities might be followed instead which will
promote efficient outcomes that benefit consumers such as lower prices and higher quantities.
This may only be true in the short run however if monopolists use these objectives to
strengthen their position in the industry before truly dominating and profit maximising in the
long run.