Question

What's wrong with the following statement? Given that the future is largely unpredictable, firms' managers should largely focus on maximizing short-term profits.

Answer 1

The manegerial theory departs from the conventional microeconomic theory from single motive of profit maximization, to various motives such as market share, creating and diverting market areas, etc. If one concerns only the short run profit maximization, then they are fine in a kind of ideal scenario of the market. In the real world, market share is a major target, and product homogeneity, is more rare while the product similarity are more common, varying with different degrees of substitution.

The firm's future is largely unpredictable as new technology and new entrants might emerge, especially seeing the profits in the market. Moreover, the manegerial theories such as Baumol's theorem, etc, enforces that firms maximizes sales after touching a critical minimum profit, rather than maximizing just profit. The market share is, in a way, a gaurantee of the long durability of the firm. That is why, yet firm as a whole might seek profit maximization, the manager should not largely focus on maximizing short-term profit.