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SALES MAXMIZATION - BOUMOLS MODEL

Introduction: sales maximization model of oligopoly


is another important alternative to profit
maximization. W.J Boumol challenges to profit
maximization assumption regarding business behavior
in these days of manager dominated corporate form of
business organization and show sales maximization is
more valid and realistic assumption of business
behavior, further pointed out sales maximization was
quite consistent with rationality assumption about
business behavior.
Baoumol argues that there is a minimum acceptable
profit which must be earned by the management so as
to finance future growth of the firm through retained
profits and also to induce the potential shareholders
for subscribing in the share capital of the company.

Thus according to him, management of oligopolistic
firms seeks maximize sales or in other words total
revenue subject to this minimum profits constraint.
Baumoss Hypothesis:
The oligopolist typically seek to maximize their sales
subject to a minimum profit constraint. The
determination of the minimum just acceptable profit
level is a major analytical problem.
Profit must be high enough to provide the
retained earnings needed to finance current expansion
plans and dividends sufficient to make future issue of
stocks attractive to potential purchasers . In other
words the firm will aim for that stream of profits which
allows for the financing of maximum long-run sales.
The business jargon for this is that management seeks
to retain earnings is sufficient magnitude to take
advantage of all reasonably safe opportunities for
Growth and to provide a fair return to share holders.
He draws out the conclusions reached regarding
these things in the sales maximization model and how
they differ from those profit maximization models. We
explain below all these aspects of Baumoss sales
maximization model of oligopoly.













TR
Profit constraint
R
R1 TC
K
H
E
N A B
C
TP
M
L
G
Y
X
In the above diagram TC and TR are total cost and
total revenue curves respectively.
A firm aims at maximizing profits, it will produce OA
level of output because corresponding to OA output,
the highest of the profit cure TP lies.

If firm wants to maximize sale revenue it will fix
output at OC level which is greater than OA. At output
OC output total revenue is CR2 which is maximum in
the diagram.
At the output level of OC firm's total profit is CG.

If OM is the minimum profit which a firm has to obtain
to satisfy shareholders and for future growth, the ML
is the minimum profit line. This minimum profit line
ML cuts the total profit cure TP at point E, therefore, if
the firm wants total revenue maximization subject to

a profit constraint OM then it will produce and sell
output OB the firm can earn minimum profits OM
even by producing ON output. But the total revenue
at ON is much less than at OB.

Implications of this model:

1. Sales maximization leads to greater output and
lower prices than profit maximization.
2. increase in advertising outlay always raises to total
revenue or sales. i.e. dR>0. as a result will always
___
dA
Pay sales maximiser to increase his advertising
outlay.



3. Increase in overhead costs lower the level of
output and raises prices.
4. Sales maximization makes presumption that the
businessmen will consider non-price competition to
more advantageous alternative to price
competition.


WILLIAMSONSS MANAGERIAL THEORY:

According to Williamson, the managers are
motivated by their self-interest and they maximizing
their own utility function. utility maximization by
the self-interest seeking mangers like sales
maximization model Baumol, is possible only in
corporate form of business organization.


According to Willamson utility function of the self-
seeking managers depends on the following factors.
The sales and other forms of monetary
compensation.
the number of staff under the control of manager.
management slack.( lavishly furnished office,
luxurious company cars, large expenses accounts)
magnitude of the discretionary investment
expenditure by the manager.
Thus utility of a manager in Williamsons model is a
function of the following three variables.
U=f(S,M,Id)
Where U stands for utility function.
M stands for management slack.
Id stands for monetary expenditure on the staff.
Implication of the model:

As compared to profit-maximization firm utility
maximization firm has higher staff expenditure
and more management slack.
if the profit tax-rate is increased there will be
increase in the output and staff expenditure of the
firm.
If a lump-sum tax is imposed on the firm
Williamsons model implies that the firm will
reduce its expenditure, particularly on staff.
This is because with the imposition of lump-sum tax
minimum profit constraint is raised and to earn the
high profits the manager will