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Introduction
The principle of profit maximization primarily focuses on the very fact that the fundamental motive of any business entity is maximizing its profits consequently maximizing the income of all of its shareholders. Maximization of sales, stock price, market share, and cash flow would all lead to profit maximization of the firm. Identification of the point where there exists the maximum difference between total revenue and total cost would help the firm in achieving the maximum profit. A few basic rules that would apply to this principle are: Increasing the output as long as there is an increase in the marginal profit, where marginal revenue (MR) is greater than marginal cost (MC) and profits would decrease if MC is less than MR. If both the previous concepts are summed up, it would translate to the fact that the firm would achieve maximum profit if MR = MC.
Baumol and Williamson’s perspective on company objectives – Although practically, all organizations across the globe exist for commercial benefits and their primary objective is profit maximization, according to W. J. Baumol and Williamson, there are many other potential financial objectives other than pure profit maximization. According to Baumol, maximizing sales revenue can be considered as an alternative goal to profit maximization. Baumol feels that modern day managers only make sure that considerable profit level, by way of pursuing a goal that would consequently enhance their individual utility. The rationale behind the above hypothesis of Baumol is that in the modern day business world, the management is believed to have been separated from ownership. This has resulted in managers, today pursuing their individual goals rather than trying to pursue the goals of the business owner. According to Williamson, modern day managers, instead of maximizing the profit of the business thereby resulting in utility maximization of the firm, are trying to maximize their own utility using their own prudence. Nevertheless, for the sake of their job security, they try to maximize the shareholders’ profit to a little extent.
The fundamental goal of any business entity in this world is none other than profit maximization. However, there are also alternative approaches to this fact as some feel that maximizing the chances of the very survival of the firm is an equally important objective. There are many alternative models which highlight issues like maximizing the growth of the firm and increasing the size of the firm are all alternative objectives. The difference between primary and secondary objectives is that primary objectives of any business entity would be to offer their consumers saleable goods and services. However, reliability, quality, reasonable price, competitiveness, are all supplementary factors that are to be considered while talking about the primary objectives. Secondary objectives are the ones that support in accomplishing the primary objectives of the firm. They constantly remind the management of the preset targets that enhance the efficiency of the firm’s performance.
No business entity or enterprise in this world can start unless it has got a purpose, aim, or objective that is aimed at attaining. It is similar to a distant navigational aid that assists the firm to keep the direction and re-navigate in case the path changes. The activity of planning begins when the objectives of the company are defined. Objectives are a vital requirement for operating successfully in the business environment. Objectives are something that is set by the business entity that is to be accomplished. They form the most essential part of the business plan and they are related to the future. They offer the right directions to all the various functions and plans of a business entity. “Objectives are not sacrosanct in the sense that a change in situation will have a bearing on these and they may be changed.” When both supply and demand intermingle liberally, competitive markets become more efficient as they produce what people want at least cost. There are plethora of naturally happening causes of market failure. The power of monopoly supports the firms with the incentive to under produce and overprice; and also taxes and subsidies may misrepresent the choices made by the consumer, external costs such as pollution and congestion may result in either over- or underproduction of a few goods in the market, and ultimately artificial price floors and price ceilings may also have similar kind of effects.
Historically, there has been continuous instability in economic trends. There is evidently no definite modus. The fluctuation within the economic platform has led to our current predicament. Our economy is currently frozen, it is neither falling nor is it rising. By examining the past economic structures, one can arguably see how previous structures have affected economics in contemporary America. However, currently we are at a halt. Historically, past transgressions were used as a foresight for future endeavors; however with the spread of Globalization this in no longer the case. In order to understand the forces that lead to our current economic stagnation a view of the historical process in developing our economy is necessary. There is evidently no definite modus operandi for success; if there were, the number of successes that have been experience would have been high in number. A few strategies seem to work for some time and then halt; some strategies seem to work in some nations or economies while not in others.
This paper discusses the merger between US Airways and American Airways from the managerial economics perspective.
The industry that is being discussed in this merger is the airline industry and the same is defined as one where people and merchandise move between different places in the world using air transport. The principal product in the airline industry is nothing but transportation services. Complements and substitutes essential impact the quantity of good that is being demanded. A substitute good is a good that can be used instead of the actual good. On the other hand, complements are goods or services that are used in combination with one another. For instance, butter and jam are complement products. Theoretically stated, if the price of butter increases, then consumers prefer to buy less butter and also equally lesser quantity of jam as both these goods go together. There certainly exists substitution in this industry; however, the same is with respect to the consumer and not with regards to the producer. For instance, if a consumer wants to go to a particular destination, there are possibilities wherein the mode of transportation can be either roadways, railways, or even through water and need not necessarily be air transport. However, if the case of the producer is considered, there is no possibility of substitution.
It is vital that the organization sets in motion a very strong strategy in order to smoothly handle its operations. Strategy should be rigid enough to maintain the operations of the organization while being supple enough to respond and adapt to the changes in the dynamic market place (Donald, 1995) (Biz/ed, 2002).
While the American Airlines and US Airways Merger would create the world’s largest airlines and the company is gung-ho on creating this size of an entity, and the CEO has been given a fat 44% hike in the compensation package taking it to 5.5 million USD, there are also detractors and anti-trust regulators who are looking at reduction in competition of more than 1,600 routes used by over 53 million passengers annually. The resulting entity, however, on the other side creates greater opportunities for the employees, better service and larger loyalty programs for customers experiencing greater and better travel experiences would also benefit the community by being a major employer and final stakeholder – the investor would get superior values and better return on investment since it creates complementary networks, thus, this merger giving enhanced value for all the important stakeholders.
The ability of the organization to transform a particular situation in the marketplace into an opportunity depends totally on the flexibility the organization maintains in its decision making systems. Ideally a low-cost method of entering into a particular market is recommended. Healthcare firms that are trying to expand their presence into international markets have to initially check potential opportunities in the chosen markets. The second step is the selection of a suitable international market for entry. When entering new markets for first time, firms should preferably choose an affable and easy-to-enter economy, and also choose markets or economies which have a common language. Post this; the choice of the entry strategy needs to be made. The inclination towards a specific entry mode is based on a plethora of both the domestic and peripheral factors regarding the organization. The social relations of the organization also have a great influence on the choice of entry mode chosen by the organization.
Flights would operate at very odd timings. This way airlines cash in on non-congestion timings. Also flights at that time would not require spending too much time to get permissions for taking off and landing and this way they would be much faster and as a result they save more money on fuel (Andrew C. Gross et al, 1998). Each employee of the airline had to perform multiple roles. The same person served at the ticketing counter, rushed to the check in counter and later moved to the dispatch area to dispatch the aircraft. Some areas for revenue that are usually not seen as the sources of revenue are – display of advertisements on the fuselage of aircrafts. Though this statement sounds ridiculous it is possible and is also equally true. In cabin magazines are other similar aspects wherein the airlines get no revenue and hence a few low-cost airlines withdraw these. Low-cost airlines also economize to an extent wherein only point to point services are provided. Additional baggage weights are also charged a very high price.
One of the primary motives behind the merger between American Airlines and US Airways is that American Airlines could save itself from filing bankruptcy. The second motive could be the merged entity would have about 1.5 billion USD in additional revenue. Additionally, main unions of the American Airlines supported the deal because they were promised lesser amounts of job losses to the employees. Other strategic motives behind the merger include rationalizing of the route network, becoming dominant in a few routes; unite purchases, maintenance, as well as repairs and this essentially resembles to be a defensive strategy rather than being proactive one.
The merger of the American Airlines and US Airways creates much larger advantages for the employees of both the parties. What could possible result is improved compensation benefits, better long-term opportunities, reciprocal travel benefits and the pride of being part of the world’s largest and highly competitive airline. Today, globalization which is defined to be a process of continuing integration of different global nations and economies, has already taken its path in many global geographies. Many national economies are being exposed to a higher cut throat competition than earlier. The sole reason for this being globalization supported by the accelerating pace of the advancements in technology, the liberalization of the prices and trade practices and also by the increasing importance to super national rules.
There are essentially five types of mergers that the US Department of Commerce identifies. They are namely, Conglomerate merger (merger between firms that are in totally not related activities), Horizontal merger (merger between organizations in the same industry, typically consolidation), Market Extension mergers (merger between organizations dealing in same products in different markets), Product Extension mergers (mergers between companies producing related products and operating in same markets), and lastly Vertical mergers (mergers between organizations producing varied goods for one specific finished products). The merger between American Airlines and US Airways can be classified as a Market Extension merger because both the merging companies earlier are airlines but in slightly different markets. The merger between these two entities would result in the merger company accessing much larger marketplace and larger consumer base. Hence, this particular merger between American Airlines and US Airways can be safely classified as a Market extension merger.
“The stakeholders and shareholders of both the organizations are anticipated to profit heavily from the futuristic outlook and a projection of the newly formed entity, which is anticipated to have roughly $40 billion in revenues depending on the collaboration of each organization’s projected performance for the year 2013”. The market impact of this merger is that many other smaller airlines like Spirit airlines and Jet Blue airlines will benefit a lot from this deal as these smaller airlines would take advantage from “the sale of the merged carriers’ excess take-off and landing slots at airports around the country”.
Through their respective ownership stakes, both the American Airlines and US Airways shareholders’ are estimated to profit from the substantial positive outlook for the new entity that would be formed through the merger and the same would have a joint equity value of roughly $11 billion. The merger between the two entities is expected to result in superior value to the stakeholders of American Airlines and is anticipated to be vitally accretive to “EPS for US Airways shareholders in 2014”. The deal is anticipated to result in more than 1 billion USD in annual net synergies two years down the line, precisely in 2015, encompassing 900 million USD in network revenue collaborations.
The objectives organizations normally, as already stated are the ones the firm is aiming to achieve in the long-run. These are set in terms of profitability, return on investment, competitive position, technological front, productivity, employee relations, etc. All these aspects will differ depending on the size of the firm. This would translate to the very fact that the objectives of small and large firms differ.
Pricing is basically the value determination process for the goods and services offered by the company. Pricing encompasses the determination of interest rates for loans, service charges, and price of the product. The price or cost function determines the behavior of the costs considering change in the final output. The pricing decision gains significance when the firm has to allocate resources and determining the cost of the output. Pricing is the sole aspect of consideration in the functional strategy of the firm. Price influences demand and supply, profitability, customer perceptions, etc. The approach to pricing strategy may be influenced by various factors like cost, market, or competition. “Pricing decisions are centered on total cost with an acceptable markup or target price ranges, under const-oriented approach.” When the pricing approach is market-oriented, the same is based on the consumer demand. If the company adopts a competitive-approach to pricing, then the pricing decisions are focused on the competitive players in the market.
According to microeconomics, the law of supply can be described as follows – all other factors remaining equal, as the price of the good increases, the quantity supplied by the suppliers also increases. Demand basically is defined as the relationship between various prices and quantities of goods which consumers are willing and being able to buy, keeping all other things constant. Typically consumers are inclined buying goods at lesser prices rather than by paying more. This phenomenon typically indicates the movement along the demand curve. For example if we consider the example of bonds, the higher is the price of the bond in the market, the lesser is the demand for the same.
The most common approach towards the study of the behaviour of the firms and their existence is Market Structures. The types of decisions that are made by the firm and the potential of the firm to make profits in the long-run are highly dependent on the type o the market structure within which the firm operates. The structure of the firm has an impact on its performance. The market structure influences the strategic decisions that the firm makes. There are basically two types of market structures namely, perfect and imperfect competition. In a perfectly competitive market, all the goods are homogeneous in nature, and all the firms are price takers. However, this type of market scenario is rarely observed. On the contrary, imperfect competition is the most common form of market structure that is prevalent. In an imperfect competition market structure, the numbers of sellers are low, and the price and product differentiation wars are very common.
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