Baumol’s Model of

Sales Revenue Maximisation

W.J.Baumol suggested
Sales Revenue maximisation as an alternative goal to
profit maximisation.
Managers only ensure acceptable level of profit,
pursuing a goal which enhances their own utility.
Baumol’s Model : (contd.)
Rationale of the Hypothesis:
1. Management has been separated from ownership in modern times.
2. This has given powers to Managers who pursue their own goals
rather than the goal of the owners.
3. Managers ensure a minimum acceptable level of profit to satisfy
the shareholders, but would pursue a goal which enhances their
own utility.
Baumol’s Model : (contd.)

Why Managers attempt to maximise sales

rather than profits:-
1. Incomes of top executives are closely
related to sales rather than profits.
2. Banks and financial institutions are
impressed by the amount of sales
and treat this as a good indicator of
the performance of the firm.
3. Large and continuing sales enhance
prestige of the Managers, who ensure
regular distribution of dividends.
Baumol’s Model : (contd.)

4 A steady performance with satisfactory

amount of profits is preferably to
irregular spectacular profits in some one
or two years. Having shown high profits,
if the level is not maintained, it will
lead to discontent of shareholders.
5. Large sales strengthens the competitive
power of the firm vis-avis competitors,
while low or declining sales diminishes
this power of bargaining.
Separation of ownership and management combined with the desire for
steady performance which ensures satisfactory profits, tend to make
the managers risk avoiders. Top Managers in the modern firm are
generally reluctant to adopt highly promising but risk-prone projects.
But this approach stabilises the economic performance of the firm
and leads to development of orderly markets.
Basic assumptions in Baumol’s
Static Models:
1. A firm’s decision making is limited to a
single period. During this period, the firm
attempts to maximise total revenue rather
than physical volume of sales.
2. Sales revenue maximisation is subject to
provision of minimum required profit to
ensure a fair dividend to shareholders, thus
ensuring stability of his job.
3. Conventional Cost and Revenue functions
are assumed – Cost curves are U-shaped,
Demand curve is downward sloping.