A firm’s profitability is considered to not always be a good indicator of a dominant position. A firm’s profitability represents its aptitude to gain profit. The level of a firm’s profit can be a sign of dominance, but it is debatable if a decision regarding market power should be based only on the value of profit. Making profits is the goal of a company and it can be achieved through efficient behavior. Punishing a firm for being efficient may harm in the end the consumers. Nevertheless, the difference between economic profit and accounting profit is important to explain when determining if market power exists. While economic profit can be a warning of dominance, it is less probable for accounting profit to lead to market power. Besides profit, …show more content…
A firm can make profits if it is acting efficient on the market and it manages its costs better than its competitors. Levy et al (1997) consider that the profits influence the firm’s decisions regarding output, workers and investment. “Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run.” (Hofstrand, 2009) When discussing profits and market power, a distinction between accounting profits and economic profits has to be …show more content…
There is no doubt that profitability can be an indicator of market power, but it is important to not base the decision of market power only on this aspect. As explained, the profit can also be a sign of efficiency and high profits can be achieved in competitive markets through legit actions. Profits are an incentive for firms to innovate and expand. If the profit becomes directly associated with market power, the companies may stop to invest in innovation that could lead to lower production costs. Nevertheless, small companies may not be interested anymore to expand and will try to keep their profits at a certain level that would not make them dominant. On a long term, these aspects are harmful for the consumer. Profits should be seen as an indicator for market power as long as there are more factors
Financial records are very important aspects to any corporation and making sure the records are accurate is essential. Determining how a corporation is going to do is a guess but it is based on previous year's financial statements and that is a reason finical records are so important. Making a profit is a goal for any corporation.
Most companies’ primary goal is to maximise profit in order to remain competitive in the market. The concern usually arises in the measures and approaches companies take to achieve that goal and how it will benefit in the short-term and long-term process. (Eccles, 2011)
The conventional definition of market power is usually expressed as "the power to raise price." A company with market power has some amount of discretion to set its own price. Others can define market power as the power to force a purchaser to do something that he would not do in a competitive market, and have ordinarily inferred the existence of such power from the seller's possession of a predominate share of the market (Eastman Kodak v. Image Technical Servs, 1992). Market power could also be defined as the power profitably to raise or maintain price above the competitive benchmark price. The competitive benchmark is the price that would prevail in the absence of the alleged anticompetitive conduct. This benchmark price often differs from both the current price and the perfectly competitive price (Salop, Steven C, 1999). In economics, market power is the ability of a firm to alter the market price of a good or service (Wikipedia). A firm with market power can raise price without losing all customers to competitors.
market. Since, profits are indefinite; monopolies need not diversify nor improve in their products. Therefore, profits do not serve any useful social purpose in monopoly as they do in pure competition (Ulbrich,
On one hand, businesses must be profitable to survive and corporations must earn a higher return on the shareholders equity than would be realized if the money were deposited on a no-risk bank account. The profits that are made create trust from investors and are usually reflected in higher stock-prices, which makes it easier to grow the company further towards its goals. The profits are not only a result, but also a source of corporate competitive health and wealth. On the other hand, companies are networks of parties and people working together towards a shared goal and not merely 'economic machines'.
accounting profit and true profit. This was portrayed by Hines (1988) as simply ‘measuring the
It is a well-known fact that every firm wants to be successful in its business. Sometimes it is difficult to decide what kind of actions to take in order to achieve it. Especially, it is hard on oligopoly market because this is one of the most complicated market structures. Oligopoly includes many models and theories such as duopoly where are just two producers and which pricing decisions remind monopoly, kinked demand curve, which decreases economic profit, and cartel, which brings economic profit just for the short-run. However, to be a successful oligopolistic firm in the long run, managers should include in the planning process such economic theories and models as producer interdependence, the prisoner’s dilemma, price leadership, nonprice adjustments, and correct using of barriers to entry.
No single firm can influence market price in a competitive industry; therefore a firm’s demand curve is perfectly elastic and price equals marginal revenue. Short-run profit maximization by a competitive firm can be analyzed by comparing total revenue and total cost or applying marginal analysis. A firm maximizes its short-run profit by producing that output at which total revenue exceeds total cost by the greatest amount.
Financial and Managerial accounting are used for making sound financial decisions about an organization. They provide information of past quantitative financial activities and are useful in making future economic decisions. (Albrecht, Stice, Stice, & Skousen, 2002) The same financial data is used to derive reports for each accounting process yet they differ in some ways. Financial accounting primarily provides external reports for external users such as stock holders, creditors, regulating authority and others. (Garrison, Noreen, & Brewer, 2010) On the other hand Managerial accounting is concern with providing information that deals with the internal viability of the organization and is tailored to meet the needs of an individual organization. (Albrecht, Stice, Stice, & Skousen, 2002)
Financial accounting is the analysis, classification, and recording of financial transactions and reporting such information to respective users especially external users who use the information to make decisions about their engagements with the entity. In financial accounting general purpose financial statements are used for external reporting. The public by standards imposes the development of the statements through respective national professional bodies, International Accounting Standards Board and respective company Acts for various nations.
The biggest threat to profitability is “The level of rivalry among organizations in an industry”, because there are many competing companies. It might depend on the areas, but some of them are very famous in the U.S. I often see Domino’ s and Pizza Hut and they are also famous in Japan. The Sbarro was not popular by last year and experienced bankruptcy two times. It will be difficult for the Sbarro to win other popular companies.
Making an analysis of the profitability of the shareholder can be seen that although both companies have similar returns, the source of this return is different.
Profit maximisation has been adopted by management in the company mainly because of several reasons. In order for an organisation to survive against competition in goods, services and financial market, it requires profits. Such competition forces management to pay close attention to profits. In addition, the compensation of management is closely related to profitability.
... earn their profit. Therefore, if a company is not performing up to the investors’ expectations, it can put a lot of pressure on them.
In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.