(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 308

CHAPTER 8 • 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 8. 1 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.