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Sales maximization model of oligopoly is another important alternative to profit maximization assumption regarding business behavior. Baumos argues that there is a minimum acceptable profit which must be earned by the management so as to finance future growth of the firm. Oligopolist typically seek to maximize their sales subject to a minimum profit constraint.
Sales maximization model of oligopoly is another important alternative to profit maximization assumption regarding business behavior. Baumos argues that there is a minimum acceptable profit which must be earned by the management so as to finance future growth of the firm. Oligopolist typically seek to maximize their sales subject to a minimum profit constraint.
Sales maximization model of oligopoly is another important alternative to profit maximization assumption regarding business behavior. Baumos argues that there is a minimum acceptable profit which must be earned by the management so as to finance future growth of the firm. Oligopolist typically seek to maximize their sales subject to a minimum profit constraint.
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