Threats to profit maximization

There are many reasons we may not believe that firms profit maximize:

  • Principal-agent problem: The person who earns the profit (agent) is not the same as the person who receives the profit (principal)
  • Imperfect information: Firms may not know enough about the market to maximize profit
  • Inefficiency: Firms may not know how to use their resources optimally

Despite these issues, we still assume firms maximize profits with the following counter arguments:

  • Principal-agent problem: Most firms have mechanisms in place to incentivize their employees to do well.
  • Imperfect information: Firms can maximize their expected profits when uncertainty is present.
  • Inefficiency: We assume inefficient firms learn to become efficient over time or go out of business