The following points highlight the top six reasons for limiting profits. The reasons are: 1. To Discourage Potential Competition 2. To Develop Public Relations 3. To Restrain Wage Demands of Organized Labour 4. To Maintain Customer Goodwill 5. To Maintain Control 6. To Maintain Pleasant Working Conditions.
Reason # 1. To Discourage Potential Competition:
The economic rationale for profit restriction is to hold off the entry of competitive firms in a weak monopoly situation.
Reason # 2. To Develop Public Relations:
In the words of Dean, “reported earnings are a standard for appraising a company’s pricing restraint in an inflationary period. With an eye on public relations as well as on economic welfare, many large firms set prices below maximum-profit levels when a stigma attaches to charging what buyers will pay”.
Similarly, some firms do not openly disclose their large profits because their relations with the central government may be put under strain.
Reason # 3. To Restrain Wage Demands of Organized Labour:
Any attempt to raise profits by raising prices is often neutralized by further wage increases. This is why many companies do not aim at maximizing profit.
Reason # 4. To Maintain Customer Goodwill:
Consumers often think of a ‘fair’ (just) price in terms of cost of production. When profits are high they feel that they are being exploited.
Reason # 5. To Maintain Control:
There is often need to limit profits if management’s desire is to maintain control of the firm. This is reflected in a strong preference for liquidity and a conservative attitude toward expansion. These are topics of capital budgeting.
Reason # 6. To Maintain Pleasant Working Conditions:
There are often restraints on profits imposed for the sake of good labour-management relations within the firm. A portion is used to provide certain non-financial amenities to workers in the form of subsidized food, safe and healthy working atmosphere, etc.
Moreover, many companies are now discharging their social obligations and are concerned with the direct effects of management’s decisions upon workers, consumers and the community at large.
The first four reasons explain why short-run profits are sacrificed in order to maximize long-run profits. The last two reasons explain why the managers and executives attempt to limit profits in order to maximize their own benefits.