1.1 Introduction

Years ago, one of the coauthors was trying to work with a particular bookstore to obtain the best price for the textbook that would be used in his class. The professor was negotiating with the bookstore and pointing out lower prices at Amazon and other online retailers. After a somewhat tense phone discussion, the book representative finally asked in an irritated tone, "Do you know why this bookstore exists?" If you had been posed that question, how would you have answered?

The first thought to pop into the professor's mind was "to help students?" He didn't voice his thought, though, because the question was rhetorical—he was already supposed to know the answer! In the mind of the bookstore representative, the only possible answer was, "To make a profit and keep the bookstore afloat." If those objectives occurred at the expense of students by not matching online pricing, then perhaps savvy students would just go to Amazon to get the lower price. Assumedly, if the bookstore lowered its price to meet the online retailer's price, it would lose money on each book. Stores cannot stay in business if they consistently lose money on the items they sell. But then again, it's hard to stay in business if enough students order from Amazon!

In this chapter we carefully think about and discuss why companies exist. (Another name we will use for a "company" in this course will be "firm.") The words are synonyms for our purposes and will be used interchangeably throughout the material. You may have never given thought to a general purpose for a firm's existence. In reality, every entrepreneur who starts a firm most likely has a personal reason to do so. It may be greed. It may be to help other people. It may be the person just has a lot of extra time. We recognize this reality, but to consider a general role for firms, in this topic we will think about firm existence in the context of what firms should try to do..