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CHAPTER • Profit Maximization and Competitive Supply 283 Alternative Forms of Organization Now that we’ve underscored the fact that profit maximization is a fundamental assumption in most economic analyses of firm behavior, let’s pause to consider an important qualifier to this assumption: Some forms of organizations have objectives that are quite different from profit maximization An important such organization is the cooperative—an association of businesses or people jointly owned and operated by members for mutual benefit For example, several farms might decide to enter into a cooperative agreement by which they pool their resources in order to distribute and market milk to consumers Because each participating member of the milk cooperative is an autonomous economic unit, each farm will act to maximize its own profits (rather than the profits of the cooperative as a whole), taking the common marketing and distribution agreement as given Such cooperative agreements are common in agricultural markets In many towns or cities, one can join a food cooperative, the objective of which is to provide its members with food and other groceries at the lowest possible cost Usually, a food cooperative looks like a store or small supermarket Shopping is either restricted to members or else unrestricted with members receiving discounts Prices are set so that the cooperative avoids losing money, but any profits are incidental and are returned to the members (usually in proportion to their purchases) Housing cooperatives, or co-ops, are another example of this form of organization A co-op might be an apartment building for which the title to the land and the building is owned by a corporation The member residents of the co-op own shares in the corporation, accompanied by a right to occupy a unit—an arrangement much like a long-term lease The members of the co-op can participate in the management of their building in a variety of ways: organizing social events, handling finances, or even deciding who their neighbors will be As with other types of cooperatives, the objective is not to maximize profits, but rather to provide members with high-quality housing at the lowest possible cost A related type of organization, especially relevant for housing, is the condominium A condominium (or “condo”) is a housing unit (an apartment, connected town house, or other form of real estate) that is individually owned, while use of and access to common facilities such as hallways, heating system, elevators, and exterior areas are controlled jointly by an association of condo owners Those owners also share in the payment for the maintenance and operation of those common facilities Compared to a cooperative, the condominium has the important advantage of simplifying governance, as we discuss below in Example 8.1 • cooperative Association of businesses or people jointly owned and operated by members for mutual benefit • condominium A housing unit that is individually owned but provides access to common facilities that are paid for and controlled jointly by an association of owners EX AMPLE CONDOMINIUMS VERSUS COOPERATIVES IN NEW YORK CITY While owners of condominiums must join with fellow condo owners to manage common spaces (e.g., entry areas), they can make their own decisions as to how to manage their individual units so as to achieve the greatest value possible In contrast, co-ops share joint liability on any outstanding mortgage on the co-op building and are subject to more complex governance rules Although much of the governance is usually delegated to a board that represents all co-op members, members must often spend substantial time in the governance of the association In addition, condo members can sell their units whenever and to whomever they choose, whereas co-op members must get permission from the co-op board before a sale can be made
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