7 Main Objectives of a Business

Firm

The following points highlight the seven main objectives of a business

firm. The objectives are:
1. Profit Maximisation
2. Multiple Objectives
3. Marris Growth Maximisation
4. Baumol’s Sales Maximisation
5. Output Maximisation
6. Security Profits
7. Satisfaction Maximisation.
Business Firm: Objective # 1.
Profit Maximisation:
In the conventional theory of the firm, the principal objective of a
business firm is profit maximisation. Under the assumptions of given
tastes and technology, price and output of a given product under perfect
competition are determined with the sole objective of maximising
profits. The firm is supposed to act as one of a large number of
producers which cannot influence the market price of the product.

It is the price-taker and quantity-adjuster. Thus the demand and cost

conditions for the product of the firm are determined by factors external
to the firm. In this theory, maximum profits refer to pure profits which
are a surplus above the average cost of production. It is the amount left
with the entrepreneur after he has made payments to all factors of
production, including his wages of management.

In other words, it is a residual income over and above his normal

profits. It is a necessary payment for an entrepreneur to stay in the
business. The rules for profit maximisation are (1) MC = MR and (2)
MC should cut MR from below.

Business Firm: Objective # 2.

Multiple Objectives:
The basis of the difference between the objectives of the neo-classical
firm and the modern corporation arises from the fact that the profit
maximisation objective relates to the entrepreneurial behaviour while
modem corporations are motivated by different objectives because of
the separate roles of shareholders and managers. In the latter,
shareholders have practically no influence over the actions of the
managers.

As early as in 1932, Berle and Means suggested that managers have

different goals from shareholders. They are not interested in profit
maximisation. They manage firms in their own interest rather than in
the interests of shareholders. Shareholders cannot have much influence
on managers because they do not possess adequate information about
companies.

The majority of shareholders cannot attend annual general meetings of

companies and thus give their proxies to the directors. Thus modem
firms are motivated by objectives relating to sales maximisation, output
maximisation, utility maximisation, satisfaction maximisation and
growth maximisation which we explain briefly.

a. Simon’s Satisficing Objective:

Nobel laureate, Herbert Simon was the first economist to propound the
behavioural theory of the firm. According to him, the firm’s principal
objective is not maximising profits but satisficing or satisfactory profits.

In Simon’s words:
“We must expect the firms goals to be not maximising profits but
attaining a certain level or rate of profit holding a certain share of the
market or a certain level of sales.” Under conditions of uncertainty, a
firm cannot know whether profits are being maximised or not.

In analysing the behaviour of the firm, Simon compares the

organisational behaviour with individual behaviour. According to him,
a firm, like an individual, has its aspiration level in keeping with its
needs, drives and achievement of goals.

The firm aspires to achieve a certain minimum or ‘target’ level of profits.

Its aspiration level is based on its different goals such as production,
price, sales, profits, etc., and on its past experience. This also takes into
account uncertainties in the future. The aspiration level defines the
boundary between satisfactory and unsatisfactory outcomes.

In this context, the firm may face three alternative situations:

(a) The actual achievement is less than the aspiration level;

(b) The actual achievement is greater than the aspiration level; and

(c) The actual achievement equals the aspiration level.

In the first situation, when the actual achievement lags behind the
aspiration level, it may be due to wide fluctuations in economic activity
or on account of qualitative deterioration in the performance level of
the firm.

In the second situation, when the actual achievement is greater than the
aspiration level, the firm is satisfied with its commendable
performance. The firm is also satisfied in the third situation when its
actual performance matches its aspiration level. But the firm does not
feel satisfied in the first situation.

It may be that the firm has set its aspiration level very high. It will,
therefore, revise it downward and start a search activity to fulfil its
various goals in order to achieve the aspiration level in the future.
Similarly, if the firm finds that the aspiration level can be achieved, it
will be revised upward. It is through such search activity that the firm
will be able to reach the aspiration level set by the decision-maker.

The search process may be done through sequence of possible

alternatives using past experience and rules-of-thumb as guidelines.
But the search activity is not a costless affair. “The advantage of search
activity must be balanced against its cost, and once search has revealed
that what appears to be a satisfactory course of action, it will be
abandoned for the time being. In this way, the firm’s aspiration level is
periodically adapted to circumstances and the firm’s reaction to them.
The firm is not maximising, since, partly on account of the cost, it limits
its searching activities. The firm, while behaving rationally, is
‘satisficing’ rather than maximising.”

Criticism:
This theory has certain weaknesses.

1. The main weakness of the satisficing theory of Simon is that he has

not specified the ‘target’ level of profits which a firm aspires to reach.
Unless that is known it is not possible to point out the precise areas of
conflict between the objectives of profit maximising and satisficing.
2. Baumol and Quant do not agree with Simon’s notion of ‘satisficing’.
According to them, it is “constrained maximisation with only
constraints and no maximisation.”

Despite these weaknesses, Simon’s model was the first model on which
the later behavioural models have been developed.

b. Behavioural theory of organisational goals:

Cyert and March have put forth a systematic behavioural theory of the
firm. In a modern large multiproduct firm, ownership is separate from
management. Here the firm is not considered as a single entity with a
single goal of profit maximisation by the entrepreneur.

Instead, Cyert and March regard the modem business firm as a group
of individuals who are engaged in the decision-making process relating
to its internal structure having multiple goals. They emphasise that the
modern business firm is so complex that individuals within it have
limited information and imperfect foresight with respect to both
internal and external developments.

Organisational goals:
Cyert and March regard the modern business firm as a complex
organisation in which the decision-making process should be analysed
in variables that affect organisational goals, expectations and choices.
They look at the firm as an organisational coalition of managers,
workers, shareholders, suppliers, customers, and so on.

Looked at it from this angle, the firm can be supposed to have five
different goals: production, inventory, sales, and market share and
profit goals.

Implications of the Cyert-March Model for Price Behaviour:

They illustrate the key processes at work in an oligopolistic firm when
it makes its decisions on price, output, costs, profits, etc. In this theory,
each firm is assumed to have three sets of goals for profits, production
and sales, and three basic decisions to make on price, output and sales
effort in each time period.

It takes into consideration the firm’s environment at the beginning of

each period which reflects its past experience. Its aspiration levels are
modified in the light of this experience. The organisational slack is the
difference between total available resources and total necessary
payments to members of the coalition.

Price is sensitive to factors influencing increases and decreases in the

amount of organisational slack, to feasible reductions in expenditure on
sales promotion and to changes in profit goals.

Each firm is assumed to estimate its demand and production costs and
choose its output level. If this output level does not yield the aspired
level of profits, it searches for ways to reduce costs, re-estimate demand
and, if required, to lower its profit goal.

If the firm is prepared to lower its profit goal, it will readily reduce its
price. Thus price is found to be sensitive to factors affecting costs due to
the close relationship between prices, costs and profits.

Criticism:
The Cyert and March theory of the firm has been severely
criticised on the following grounds:
1. Economists have questioned: ‘Whether it is a theory at all? It deals
with particular cases whereas a theory is expected to be a general
approximation of the behaviour of firms. Its empirical base is too
limited to provide the details of theorising. Hence it fails as a theory of
the firm.

2. The behavioural theory relates to a duopoly firm and fails as the

theory of market structures.

3. The theory does not consider either the conditions of entry or the
effects on the behaviour of existing firms of a threat of potential entry
by firms.
4. The behavioural theory explains the short-run behaviour of firms and
ignores their long-run behaviour.

Conclusion:
Despite these criticisms, the behavioural theory of Cyert and March is
an important contribution to the theory of the firm which brings into
focus multiple, changing and acceptable goals in managerial decision-
making.

c. Williamson’s Utility Maximisation:

Williamson has developed managerial utility-maximisation objective as
against profit maximisation. It is one of the managerial theories and is
also known as the ‘managerial discretion theory’. In large modem firms,
shareholders and managers are two separate groups. The former want
maximum return on their investment and hence the maximisation of
profits.

The managers, on the other hand, have consideration other than profit
maximisation in their utility functions. Thus the managers are
interested not only in their own emoluments but also in the size of their
staff and expenditure on them.

Thus Williamson’s theory is related to the maximisation of the

manager’s utility which is a function of the expenditure on staff and
emoluments and discretionary funds. “To the extent that pressure
from the capital market and competition in the product
market is imperfect, the manager, therefore, has discretion
to pursue goals other than profits.”
The managers derive utility from a wide range of variables. For this
Williamson introduces the concept of expense preferences. It means
“that managers get satisfaction from using some of the firm’s potential
profits for unnecessary spending on items from which they personally
benefit.”

To pursue his goal of utility maximisation, the manager

directs the firm’s resources in three ways:
1. The manager desires to expand his staff and to increase his salaries.
“More staff is valued because they lead to the manager getting more
salary, more prestige and more security.” Such staff expenditures by the
manager are denoted by S.

2. To maximise his utility, the manager indulges in ‘featherbedding’

such as pretty secretaries, company cars, too many company phones,
‘perks’ for employees, etc. Such expenditures are characterised as
‘management slack’ (M) by Williamson.

3. The manager likes to set up ‘discretionary funds’ for making

investments to advance or promote company projects that are close to
his heart. Discretionary profits or investments (D) are what remain with
the manager after paying taxes and dividends to shareholders in order
to retain an effective control of the firm.

Thus the manager’s utility function is

U = f (S, M. D).

Where U is the utility function, S is the staff expenditure, M is the

management slack and D is the discretionary investments. These
decision variables (S, M, and D) yield positive utility and the firm will
always choose their values subject to the constraints, S 3 О, M 3 О and
D 3 O. Williamson assumes that the law of diminishing marginal utility
applies so that when additions are made to each of S, M and D, they
yield smaller increments of utility to the manager.
To explain Williamson’s utility maximisation theory diagrammatically,
it is assumed for the sake of simplicity that

U = f(S, D)

So that discretionary profits (D) are measured along the vertical axis
and staff expenditures (S) on the horizontal axis in Figure 1. FC is the
feasibility curve showing the combinations of D and S available to the
manager. It is also known as the profit-staff curve. UU1 and UU2 are the
indifference curves of the manager which show the combinations of D
and S.
To begin, as we move along the profit-staff curve from point F upward,
both profits and staff expenditures increase till point P is reached.

P is the profit maximisation point for the firm where SP is the maximum
profit levels when OS staff expenditures are incurred. But the
equilibrium of the firm takes place when the manager chooses the
tangency point M where his highest possible utility function UU2 and
the feasibility curve FC touch each other. Here the manager’s utility is
maximised.
The discretionary profits OD (=S1M) are less than the profit
maximisation profits SP. But the staff emoluments OS1 are maximised.
However, Williamson points out that factors like taxes, changes in
business conditions, etc. by affecting the feasibility curve can shift the
optimum tangency point, like M in Figure 1. Similarly, factors like
changes in staff, emoluments, profits of stockholders, etc. by changing
the shape of the utility function will shift the optimum position.

Criticism:
But there are some conceptual weaknesses of this model.

1. He does not clarify the basis of the derivation of his feasibility curve.
In particular, he fails to indicate the constraint in the profit-staff
relation, as shown by the shape of the feasibility curve.
2. He lumps together staff and manager’s emoluments in the utility
curve. This mixing up of non-pecuniary and pecuniary benefits of the
manager makes the utility function ambiguous.

3. This model does not deal with oligopolistic interdependence and of

oligopolistic rivalry.

Business Firm: Objective # 3.

Marris Growth Maximisation:
Robin Marris in his book The Economic Theory of ‘Managerial’
Capitalism (1964) has developed a dynamic balanced growth
maximising theory of the firm. He concentrates on the proposition that
modern big firms are managed by managers and the shareholders are
the owners who decide about the management of the firms.

The managers aim at the maximisation of the growth rate of the firm
and the shareholders aim at the maximisation of their dividends and
share prices. To establish a link between such a growth rate and the
share prices of the firm, Marris develops a balanced growth model in
which the manager chooses a constant growth rate at which the firm’s
sales, profits, assets, etc., grow.

If he chooses a higher growth rate, he will have to spend more on

advertisement and on R & D in order to create more demand and new
products.

He will, therefore, retain a higher proportion of total profits for the

expansion of the firm. Consequently, profits to be distributed to
shareholders in the form of dividends will be reduced and the share
prices will fall. The threat of take-over of the firm will loom large among
the managers.

As the managers are concerned more about their job security and
growth of the firm, they will choose that growth rate which maximises
the market value of shares, give satisfactory dividends to shareholders,
and avoid the take-over of the firm.
On the other hand, the owners (shareholders) also want balanced
growth of the firm because it ensures fair return on their capital. Thus
the goals of the managers may coincide with that of owners of the firm
and both try to achieve balanced growth of the firm.

Criticism:
Marris’ growth-maximisation theory has been severely
criticised for its over-simplified assumptions.
1. Marris assumes a given price structure for the firms. He, therefore,
does not explain how prices of products are determined in the market.

2. It ignores the problem of oligopolistic interdependence of firms.

3 This model also does not analyse interdependence created by non-

price competition.

4. The model assumes that firms can grow continuously by creating new
products. This is unrealistic because no firm can sell anything to the
consumers. After all, consumers have their preferences for certain
brands which also change when new products enter the market.

5. The assumption that all major variables such as profits, sales and
costs increase at the same rate is highly unrealistic.

6. It is also doubtful that a firm would continue to grow at a constant

rate, as assumed by Marris. The firm might grow faster now and slowly
later on.

Despite these criticisms, Marris’ theory is an important contribution to

the theory of the firm in explaining how a firm maximises its growth
rate.

Business Firm: Objective # 4.

Baumol’s Sales Maximisation:
Baumol’s findings of oligopoly firms in America reveal that they follow
the sales maximisation objective. According to Baumol, with the
separation of ownership and control in modern corporations, managers
seek prestige and higher salaries by trying to expand company sales
even at the expense of profits.

Being a consultant to a number of firms, Baumol observes that when

asked how their business went last year, the business managers often
respond, “Our sales were up to three million dollars”. Thus, according
to Baumol, revenue or sales maximisation rather than profit
maximisation is consistent with the actual behaviour of firms.

Baumol cites evidence to suggest that short-run revenue maximisation

may be consistent with long-run profit maximisation. But sales
maximisation is regarded as the short-run and long-run goal of the
management. Sales maximisation is not only a means but an end in
itself. He gives a number of arguments is support of his theory.
According to him, a firm attaches great importance to the magnitude of
sales and is much concerned about declining sales.

If the sales of a firm are declining, banks, creditors and the capital
market are not prepared to provide finance to it. Its own distributors
and dealers might stop taking interest in it. Consumers might not buy
its products because of its unpopularity. But if sales are large, the size
of the firm expands which, in turn, means larger profits.

Baumol’s model is illustrated in Figure 2 where TC is the total cost

curve, TR the total revenue curve, TP the total profit curve and MP the
minimum profit or profit constraint line. The firm maximises its profits
at OQ level of output corresponding to the highest point В on the TP
curve. But the aim of the firm is to maximise its sales rather than profits.
Its sales maximisation output is OK where the total revenue KL is the
maximum at the highest point of TR. This sales maximisation output
OK is higher than the profit maximisation output OQ. But sales
maximisation is subject to minimum profit constraint.

Suppose the minimum profit level of the firm is represented by the line
MP. The output OK will not maximise sales as the minimum profits OM
are not being covered by total profits KS.

For sales maximisation, the firm should produce that level of output
which not only covers the minimum profits but also gives the highest
total revenue consistent with it. This level is represented by OD level of
output where the minimum profits DC (=OM) are consistent with DE
amount of total revenue at the price DE/OD, (i.e., total revenue/total
output).

Criticism:
The sales maximisation objective of the firm has been criticised on a
number of points. First, Rosenberg has criticised the use of the profit
constraint for maximising sales. He has shown that it is difficult to
specify exactly the relevant profit constraint for a firm, and choose the
sales maximisation and minimum profit constraint in Baumol’s
analysis.

Second, if expenditure on advertising is introduced in Baumol’s theory,

the likelihood of sales maximisation is increased.

But this view of Baumol is not realistic because the expenditure on

advertising increases or decreases with the rise or fall in output.

Third, the objective of sales maximisation subject to profit constraint

implies that “the firm will not make any sacrifice in sales no matter how
large an increment in wealth would thereby be achievable.” Despite
these criticisms, the sales maximisation is an important objective being
pursued by business firms.
Business Firm: Objective # 5.
Output Maximisation:
Milton Kafolgis suggests output maximisation as the objective of a
business firm. According to him, “The performance of firms frequently
is measured directly in terms of physical output with revenue occupying
a secondary position.” Thus Kafolgis prefers output maximisation both
to profit maximisation and revenue maximisation as the objective of a
firm.

Given some minimum level of profits, a firm wants to maximise its

output. It will spend its funds on increasing its production rather than
on advertising. Thus the firm will produce a larger output and its
revenue sales may be less than the sales-maximisation firm.

Criticism:
Kafolgis’ emphasis on output maximisation as against Baumol’s sales
maximisation is not a satisfactory explanation of the objective of a firm.
If the firm simply aims at output maximisation without sales
maximisation, it may not be in a position to survive for long. Both the
objectives are complementary rather than competitive.

Second, if the firm is a multiproduct firm how the output of different

products, say radio, TV, and watches can be added. It is only the value
of sales of each product that can be added together. This is nothing but
maximisation of sales.

Business Firm: Objective # 6.

Security Profits:
Rothschild has put forward the view that the firm is motivated not by
profit maximisation but by the desire for security profits. In his
words, “There is another motive which is probably of a similar
order of magnitude as the desire for maximum profits, the
desire for security profits.”
Rothschild argues that so far as the objective of profit maximisation is
concerned, it is valid only under perfect competition or monopolistic
competition in which the number of firms is very large, and the
individual firm is not faced with the security problem, so is the case with
the monopoly firm.

But under oligopoly, a firm is not motivated by profit maximisation. It

is engaged in a constant struggle to achieve and maintain a secure
position in the market like a military strategist.

The desire to increase its security leads to the struggle for position and
to the setting of a price which will not be so low that it provokes
retaliation from rivals, nor so high that it encourages new entrants, and
it must be within the range which will maintain a protection against the
aggressive policies of the rivals and brine about a reasonable profit
above its cost of production Rothschild’s security-profits motive is
nothing else but profit maximisation in a little different garb.

Business Firm: Objective # 7.

Satisfaction Maximisation:
Scitovsky favours maximisation of satisfaction in preference to the
profit-maximisation objective of the firm. He is concerned with
managerial effort and the distaste that managers have for work.
According to him an entrepreneur would maximise profits only if his
choice between more income and more leisure is independent of his
income. In other words, the supply of entrepreneurship should have
zero income elasticity.

But an entrepreneur does not aim at profit maximisation. He wants to

maximise satisfaction and keep his efforts and output below the level of
maximum profits.
This is because as his income (profit) increases, he prefers leisure to
effort (output) Scitovsky’s maximisation of satisfaction hypothesis is
illustrated in Fig 3 where NP is the net profit (income) curve, the
difference between the TR and TC curves, which have not been drawn
to simplify the analysis. Thus profits are measured on the vertical axis.

Assuming managerial effort and output to be proportional output is

measured along the horizontal axis from P toward О so that at point P
output is zero. Since more efforts mean less leisure, and vice versa,
leisure is also measured on the horizontal axis from О toward P.

The curves L1 and L2 are the entrepreneur’s indifference curves which

represent his levels of satisfaction yielding combinations of his money
income (profits) and leisure.
The entrepreneur’s satisfaction would be the greatest at the level of
output where the net profit curve is tangential to an indifference curve.
In the figure, M is his point of maximum satisfaction where the net
profit curve NP is tangent to his indifference curve L2. He will be
producing PQ1 output.
This level of output is less than the profit-maximisation output PQ. The
entrepreneurial profits, Q1M1, at PQ1 output level are also less than the
maximum profits QM at PQ level of output. At Q1M1, level of profit, the
entrepreneur maximises his satisfaction because he enjoys OQ1 leisure
which is QQ1 more than he would have enjoyed under profit
maximisation (OQ).

Criticism:
Scitovsky has himself pointed out two weaknesses in his satisfaction
maximisation theory first; it is unrealistic to assume that entrepreneur’s
willingness to work is independent of his income. After all the ambition
of an entrepreneur to make money cannot be dampened by a rising
income.

Second, to say that an entrepreneur maximises his satisfaction is a

perfectly general statement, it says nothing about his psychology or
behaviour. Therefore, it is only a truism and is devoid of any empirical
content.
 PROFIT MAXIMISATION THEORY

Profit-making is one of the most traditional, basic and major objectives

of a firm. Profit-making is the driving-force behind all business activities of a
company. It is the primary measure of success or failure of a firm in the
market. Profit earning capacity indicates the position, performance and
status of a firm in the market. It is an acid test of economic ability and
performance of an individual firm. There is no place for a firm unless it earns
a reasonable amount of profit in the business. It is necessary to stay in
business and maintain intact the wealth producing agents. It is a widely
accepted goal and there is nothing bad or immoral about it. Earlier profit
maximization was the sole objective of a firm. This assumption has a long
history in economic literature and the conventional price theory was based on
this very assumption about profit making. In spite of several changes and
development of several alternative objectives, profit maximization has
remained as one of the single most important objectives of the firm even today.
Both small and large firms consistently make an attempt to maximize their
profit by adopting novel techniques in business. Specific efforts have been
made to maximize output and minimize production and other operating costs.
Costs reduction, cost cutting and cost minimization has become the slogan of
a modern firm.

Profit Maximization Model

Profit Maximization model helps to predict the price-output behaviour

of a firm under changing market conditions like tax rates, wages and salaries,
bonus, the degree of availability of resources, technology, fashions, tastes and
preferences of consumers etc. It is a very simple and unambiguous model. It
is the single most ideal model that can explain the normal behaviour of a firm.
It is often argued that no other alternative hypothesis can explain and predict
the behaviour of business firms better than profit-maximization hypothesis.
This model gives a proper insight in to the working behaviour of a firm. There
are well developed mathematical models to explain this hypothesis in a
systematic and scientific manner.

Profit-maximization implies earning highest possible amount of profits

during a given period of time. A firm has to generate largest amount of profits
by building optimum productive capacity both in the short run and long run
depending upon various internal and external factors and forces. There
should be proper balance between short run and long run objectives. In the
short run a firm is able to make only slight or minor adjustments in the
production process as well as in business conditions. The plant capacity in
the short run is fixed and as such, it can increase its production and sales by
intensive utilization of existing plants and machineries, having over time work
for the existing staff etc. Thus, in the short run, a firm has its own technical
and managerial constraints. But in the long run, as there is plenty of time at
the disposal of a firm, it can expand and add to the existing capacities, build
up new plants, employ additional workers etc to meet the rising demand in
the market. Thus, in the long run, a firm will have adequate time and ample
opportunity to make all kinds of adjustments and readjustments in
production process and in its marketing strategies.

It is to be noted with great care that a firm has to maximize its profits after
taking in to consideration of various factors in to account. They are as follows:

1. Pricing and business strategies of rival firms and its impact on the
working of the given firm.
2. Aggressive sales promotion policies adopted by rival firms in the
market.
3. Without inducing the workers to demand higher wages and salaries
leading to rise in operation costs.
4. Without inducing the workers to demand higher wages and salaries
government controls and takeovers.
5. Maintaining the quality of the product and services to the customers.
 6. Taking various kings of risks and uncertainties in the
changing business environment.
7. Adopting a stable business policy.
8. Avoiding any sort of clash between short run and long run profits in the
business policy and maintaining proper balance between them.
9. Maintaining its reputation, name, fame and image in the market.
10. Profit maximization is necessary in both perfect and imperfect
markets. In a perfect market, a firm is a price-taker and under imperfect
market it becomes a price-searcher.

In the neo-classical theory of the firm, the main objective of a business

firm is profit maximisation. The firm maximises its profits when it satisfies
the two rules. MC = MR and the MC curve cuts the MR curve from below
Maximum profits refer to pure profits which are a surplus above the average
cost of production. It is the amount left with the entrepreneur after he has
made payments to all factors of production, including his wages of
management. In other words, it is a residual income over and above his
normal profits.

The profit maximisation condition of the firm can be expressed as:

Maximise p (Q)

Where p (Q) = R (Q) – C (Q)

where p (Q) is profit, R(Q) is revenue, С (Q) are costs, and Q are the units of
output sold The two marginal rules and the profit maximisation condition
stated above are applicable both to a perfectly competitive firm and to a
monopoly firm.

The profit maximisation theory is based on the following assumptions:

1. The objective of the firm is to maximise its profits where profits are
the difference between the firm’s revenue and costs.
 2. The entrepreneur is the sole owner of the firm.

3. Tastes and habits of consumers are given and constant.

4. Techniques of production are given.

5. The firm produces a single, perfectly divisible and standardised

commodity.

6. The firm has complete knowledge about the amount of output which
can be sold at each price.

7. The firm’s own demand and costs are known with certainty.

8. New firms can enter the industry only in the long run. Entry of firms
in the short run is not possible.

9. The firm maximises its profits over some time-horizon.

10. Profits are maximised both in the short run and the long run.

Given these assumptions, the profit maximising model of the firm can
be shown under perfect competition and monopoly.

Profit Maximisation under Perfect Competition:

Under perfect competition, the firm is one among a large number of
producers. It cannot influence the market price of the product. It is the price-
taker and quantity-adjuster. It can only decide about the output to be sold at
the market price. Therefore, under conditions of perfect competition, the MR
curve of a firm coincides with its AR curve. The MR curve is horizontal to the
X-axis because the price is set by the market and the firm sells its output at
that price.

The firm is, thus, in equilibrium when MC = MR = AR (Price). The

equilibrium of the profit maximisation firm under perfect competition is
shown in Figure 1. Where the MC curve cuts the MR curve first at point A.
 It satisfies the condition of MC = MR, but it is not a point of maximum
profits because after point A, the MC curve is below the MR curve. It does not
pay the firm to produce the minimum output when it can earn larger profits
by producing beyond OM.

It will, however, stop further production when it reaches the OM1 level
of output where the firm satisfies both conditions of equilibrium. If it has any
plans to produce more than OM1 it will be incurring losses, for the marginal
cost exceeds the marginal revenue after the equilibrium point B. Thus the
firm maximises its profits at M1B price and at the output level OM1.

Profit Maximisation under Monopoly:

There being one seller of the product under monopoly, the monopoly
firm is the industry itself. Therefore, the demand curve for its product is
downward sloping to the right, given the tastes and incomes of its customers.
It is a price-maker which can set the price to its maximum advantage. But it
does not mean that the firm can set both price and output. It can do either of
the two things.

If the firm selects its output level, its price is determined by the market
demand for its product. Or, if it sets the price for its product, its output is
determined by what consumers will take at that price. In any situation, the
ultimate aim of the monopoly firm is to maximise its profits. The conditions
for equilibrium of the monopoly firm are (1) MC = MR< AR (Price), and (2) the
MC curve cuts the MR curve from below.

In Figure 2, the profit maximising level of output is OQ and the profit

maximisation price is OP (=QA). If more than OQ output is produced, MC will
be higher than MR, and the level of profit will fall. If cost and demand
conditions remain the same, the firm has no incentive to change its price and
output. The firm is said to be in equilibrium.

Criticism of the Profit Maximisation Theory:

The profit maximisation theory has been severely criticised by
economists on the following grounds:
1. Profits uncertain:
The principle of profit maximisation assumes that firms are
certain about the levels of their maximum profits. But profits are most
uncertain for they accrue from the difference between the receipt of
revenues and incurring of costs in the future. It is, therefore, not
possible for firms to maximise their profits under conditions of
uncertainty.

2. No relevance to internal organisation:

This objective of the firm bears little or no direct relevance to the
internal organisation of firms. For instance, some managers incur
expenditures apparently in excess of those that would maximise wealth
or profits of the owners of the firm. Managers of corporations are
observed to emphasize growth of total assets of the firm and its sales as
objectives of managerial actions. Also managers of firms undertake cost
reducing, efficiency increasing campaigns when demand falls.

3. No perfect knowledge:
The profit maximisation hypothesis is based on the assumption
that all firms have perfect knowledge not only about their own costs
and revenues but also of other firms. But, in reality, firms do not
possess sufficient and accurate knowledge about the conditions under
which they operate. At the most they may have knowledge about their
own costs of production, but they can never be definite about the
market demand curve. They always operate under conditions of
uncertainty and the profit maximisation theory is weak in that it
assumes that firms are certain about everything.

4. Empirical evidence vague:

The empirical evidence on profit maximisation is vague. Most
firms do not rank profits as the major goal. The working of modem firms
is so complex that they do not think merely about profit maximisation.
Their main problems are of control and management.

The function of managing these firms is performed by managers

and shareholders rather than by the entrepreneurs. They are more
interested in their emoluments and dividends respectively. Since there
is substantial separation of ownership from control in modern firms,
they are not operated so as to maximise profits.

5. Firms do not bother about MC and MR:

It is asserted that the real world firms do not bother about the
calculation of marginal revenue and marginal cost. Most of them are
not even aware of the two terms. Others do not know the demand and
marginal revenue curves faced by them.
 Still others do not possess adequate information about their cost
structure. Empirical evidence by Hall and Hitch shows that
businessman have not heard of marginal cost and marginal revenue.
After all, they are not greedy calculating machines.

6. Principle of average-cost maximises profits:

Hall and Hitch found that firms do not apply the rule of equality
of MC and MR to maximise short run profits. Rather, they aim at the
maximisation of profits in the long run. For this, they do not apply the
marginalistic rule but they fix their prices on the average cost principle.

According to this principle, price equals AVC+AFC+ profit margin

(usually 10%). Thus the main aim of the profit maximising firm is to set
a price on the average cost principle and sell its output at that price.

7. Static theory:
The neo-classical theory of the firm is static in nature. The theory
does not tell the duration of either the short period or the long period.
The time-horizon of the neo-classical firm consists of identical and
independent time-periods. Decisions are considered as independent of
the time-period.

This is a serious weakness of the profit maximisation theory. In

fact, decisions are ‘temporally interdependent’. It means that decisions
in any one period are affected by decisions in past periods which will,
in turn, influence the future decisions of the firm. This interdependence
has been ignored by the neo-classical theory of the firm.

8. Not applicable to oligopoly firm:

As a matter of fact, the profit maximisation objective has been
retained for the perfectly competitive, or monopolistic, or monopolistic
competitive firm in economic theory. But it has been abandoned in the
case of the oligopoly firm because of the criticisms levelled against it.
Hence the different objectives that have been put forth by economists
in the theory of the firm relate to the oligopoly or duopoly firm.

9. Varied Objectives:
The basis of the difference between the objectives of the neo-
classical firm and the modern corporation arises from the fact that the
profit maximisation objective relates to the entrepreneurial behaviour
while modern corporations are motivated by different objectives
because of the separate roles of shareholders and managers. In the
latter, shareholders have practically no influence over the actions of the
managers.

As early as in 1932, Berle and Means suggested that managers

have different goals from shareholders. They are not interested in profit
maximisation. They manage firms in their own interests rather than in
the interests of shareholders. Thus modern firms are motivated by
objectives relating to sales maximisation, output maximisation, utility
maximisation, satisfaction maximisation and growth maximisation.
 WILLIAMSON’S UTILITY MAXIMISATION

Williamson has developed managerial utility-maximisation objective as

against profit maximisation. It is one of the managerial theories and is also
known as the ‘managerial discretion theory’. In large modem firms,
shareholders and managers are two separate groups. The former want
maximum return on their investment and hence the maximisation of profits.

The managers, on the other hand, have consideration other than profit
maximisation in their utility functions. Thus the managers are interested not
only in their own emoluments but also in the size of their staff and
expenditure on them.

Thus Williamson’s theory is related to the maximisation of the

manager’s utility which is a function of the expenditure on staff and
emoluments and discretionary funds. “To the extent that pressure from
the capital market and competition in the product market is imperfect,
the manager, therefore, has discretion to pursue goals other than
profits.”
The managers derive utility from a wide range of variables. For this
Williamson introduces the concept of expense preferences. It means “that
managers get satisfaction from using some of the firm’s potential profits for
unnecessary spending on items from which they personally benefit.”

To pursue his goal of utility maximisation, the manager directs the firm’s
resources in three ways:
1. The manager desires to expand his staff and to increase his salaries.
“More staff is valued because they lead to the manager getting more
salary, more prestige and more security.” Such staff expenditures by
the manager are denoted by S.

2. To maximise his utility, the manager indulges in ‘featherbedding’

such as pretty secretaries, company cars, too many company phones,
‘perks’ for employees, etc. Such expenditures are characterised as
‘management slack’ (M) by Williamson.

3. The manager likes to set up ‘discretionary funds’ for making

investments to advance or promote company projects that are close to
 his heart. Discretionary profits or investments (D) are what remain with
the manager after paying taxes and dividends to shareholders in order
to retain an effective control of the firm.

Thus the manager’s utility function is

U = f (S, M. D).

Where U is the utility function, S is the staff expenditure, M is the

management slack and D is the discretionary investments. These decision
variables (S, M, and D) yield positive utility and the firm will always choose
their values subject to the constraints, S 3 О, M 3 О and D 3 O. Williamson
assumes that the law of diminishing marginal utility applies so that when
additions are made to each of S, M and D, they yield smaller increments of
utility to the manager.

To explain Williamson’s utility maximisation theory diagrammatically,

it is assumed for the sake of simplicity that

U = f(S, D)

So that discretionary profits (D) are measured along the vertical axis
and staff expenditures (S) on the horizontal axis in Figure 1. FC is the
feasibility curve showing the combinations of D and S available to the
manager. It is also known as the profit-staff curve. UU1 and UU2 are the
indifference curves of the manager which show the combinations of D and S.
To begin, as we move along the profit-staff curve from point F upward, both
profits and staff expenditures increase till point P is reached.
 P is the profit maximisation point for the firm where SP is the maximum
profit levels when OS staff expenditures are incurred. But the equilibrium of
the firm takes place when the manager chooses the tangency point M where
his highest possible utility function UU2 and the feasibility curve FC touch
each other. Here the manager’s utility is maximised.
The discretionary profits OD (=S1M) are less than the profit
maximisation profits SP. But the staff emoluments OS1 are maximised.
However, Williamson points out that factors like taxes, changes in business
conditions, etc. by affecting the feasibility curve can shift the optimum
tangency point, like M in Figure 1. Similarly, factors like changes in staff,
emoluments, profits of stockholders, etc. by changing the shape of the utility
function will shift the optimum position.
Criticism:
But there are some conceptual weaknesses of this model.

1. He does not clarify the basis of the derivation of his feasibility curve.
In particular, he fails to indicate the constraint in the profit-staff
relation, as shown by the shape of the feasibility curve.

2. He lumps together staff and manager’s emoluments in the utility

curve. This mixing up of non-pecuniary and pecuniary benefits of the
manager makes the utility function ambiguous.

3. This model does not deal with oligopolistic interdependence and of

oligopolistic rivalry.
 BAUMOL’S SALES OR REVENUE MAXIMISATION

Sales maximization model is an alternative model for profit

maximization. This model is developed by Prof. Baumol, an American
economist, in his book Business Behaviour, Value and Growth (1967) has
presented a managerial theory of the firm based on sales maximisation. He
discusses two models of sales maximisation: a static model and a dynamic
model. This alternative goal has assumed greater significance in the context
of the growth of Oligopolistic firms. Baumol’s sales revenue maximization
model highlights that the primary objective of a firm is to maximize its sales
rather than profit maximization. It states that the goal of the firm is
maximization of sales revenue subject to a minimum profit constraint. The
minimum profit constraint is determined by the expectations of the
shareholders. This is because no company can displease the shareholders.

“Though businessmen are interested in the scale of their operations

partly because they see some connection between scale and profits, I think
management’s concern with the level of sales goes considerably further. In my
dealings with them I have been struck with the importance the oligopolistic
enterprises attach to the value of their sales. A small reversal in an upward
sales trend that can quite reasonably be dismissed as a random movement
sometimes leads to a major review of the concern’s selling and production
methods, its product lines, and even its internal organizational structure.” –
Baumol

It is to be noted here that maximization of sales does not mean

maximization of physical sales but maximization of total sales revenue.
Hence, the managers are more interested in maximizing sales rather than
profit. The basic philosophy is that when sales are maximized automatically
profits of the company would also go up. Hence, attention is diverted to
increase the sales of the company in recent years in the context of highly
competitive markets.
 Maximizing sales revenue is an alternative to profit maximization and
occurs when the marginal revenue, MR, from selling an extra unit is zero. The
notion that business firms (especially those operating in the real world) are
primarily motivated by the desire to achieve the greatest possible level of sales,
rather than profit maximization. On a day-to-day basis, most real-world firms
probably do try to maximize sales rather than profit. For firms operating in
relatively competitive markets, facing relative fixed prices, and relatively
constant average cost, then increasing sales is bound to increase profits, too.
Moreover, according to the notion of natural selection, even firms that seek to
maximize sales, those that also maximize profit will remain in business. The
primary responsibility of a marketing or sales manager is to achieve sales
targets over a given time period. In addition to achieving sales targets, a sales
manager is expected to maximize sales to provide growth and increase profits.
Sales maximization is an activity that concentrates on revenue transactions
and can be accomplished by employing various sales strategies and programs.
The thought that maximizing sales will help maximize profits is not always
true. An increase in sales is associated with an increase in cost of goods sold
and other expenses. Sales maximization programs can be implemented for
many reasons and at various times, but they are not done continuously. The
start of a business, during lean seasons and at times when there is excess
inventory are examples of those times. Sales managers may refrain from
maximizing sales without the consent of general managers to avoid a possible
shortage of business resources such as inventory and manpower.

Rationalization of Baumol’s Sales Revenue Maximization Model

1. There is evidence that salaries and other earnings of top managers are
correlated more closely with sales than with profits.
2. The banks and other financial institutions keep a close eye on the sales
of firms and are more willing to finance firms with large and growing
sales.
 3. Personnel problems are handled more satisfactorily when sales are
growing. The employees at all levels can be given higher earnings and
better terms of work in general.
4. Large sales, growing over time, give prestige to the managers, while
large profits go into the pockets of shareholders.
5. Managers, prefer a steady performance with satisfactory profits to
spectacular profit maximization projects. If they realize maximum high
profits in one period, they might find themselves in trouble in other
periods when profits are less than maximum.
6. Large growing sales strengthen the power to adopt competitive tactics,
while a low or declining share of the market weakens the competitive
position of the firm and its bargaining power vis-Ã -vis rivals.

Arguments Against Sales Maximization Model

In defence of this model, the following arguments are given.

1. Increase in sales and expansion in its market share is a sign of healthy

growth of a normal company.
2. It increases the competitive ability of the firm and enhances its
influence in the market.
3. The amount of slack earnings and salaries of the top managers are
directly linked to it.
4. It helps in enhancing the prestige and reputation of top management,
distribute more dividends to shareholders and increase the wages of
workers and keep them happy.
5. The financial and other lending institutions always keep a watch on the
sales revenues of a firm as it is an indication of financial health of a
firm.
6. It helps the managers to pursue a policy of steady performance with
satisfactory levels of profits rather than spectacular profit maximization
over a period of time.
 Managers are reluctant to take up those kinds of projects which yield high
level of profits having high degree of risks and uncertainties. The risk averting
and avoiding managers prefer to select those projects which ensure steady
and satisfactory levels of profits.

Types of Baumol’s Sales Revenue Maximization Models

Prof. Boumol has developed two models. The first is static model and
the second one is the dynamic model. We shall analyse only his static model
of sales maximisation with its variants of single product model without
advertisement.

The Static Model of Sales Maximization

This model is based on the following assumptions.

1. The model is applicable to a particular time period and the model does
not operate at different periods of time.
2. The firm aims at maximizing its sales revenue subject to a minimum
profit constraint.
3. The demand curve of the firm slope downwards from left to right.
4. The average cost curve of the firm is unshaped one.

The Model:
Baumol’s findings of oligopoly firms in America reveal that they follow
the sales maximisation objective. According to Baumol, with the separation of
ownership and control in modern corporations, managers seek prestige and
higher salaries by trying to expand company sales even at the expense of
profits. Being a consultant to a number of firms, Baumol observes that when
asked how their business went last year, the business managers often
respond, “Our sales were up to three million dollars”. Thus, according to
Baumol, revenue or sales maximisation rather than profit maximisation is
consistent with the actual behaviour of firms. Baumol cites evidence to
suggest that short-run revenue maximisation may be consistent with long-
run profit maximisation. But sales maximisation is regarded as the short-run
and long-run goal of the management. Sales maximisation is not only a means
but an end in itself.

He gives a number of arguments in support of his theory.

➢ A firm attaches great importance to the magnitude of sales and is much
concerned about declining.

➢ If the sales of a firm are declining, banks, creditors and the capital
market are not prepared to provide finance to it.

➢ Its own distributors and dealers might stop taking interest in it.

➢ Consumers might not buy its product because of its unpopularity.

➢ Firm reduces its managerial and other staff with fall in sales.

➢ But if firm’s sales are large, there are economies of scale and the firm
expands and earns large profits.

➢ Salaries of workers and management also depend to a large extent on

more sales and the firm gives them bonus and other facilities.

By sales maximisation, Baumol means maximisation of total revenue. It

does not imply the sale of large quantities of output, but refers to the increase
in money sales (in rupee, dollar, etc.). Sales can increase up to the point of
profit maximization where the marginal cost equals marginal revenue. If sales
are increased beyond this point money sales may increase at the expense of
profits. But the oligopolistic firm wants its money sales to grow even though
it earns minimum profits. Minimum profits refer to the amount which is less
Quantity than maximum profits. The minimum profits are determined on the
basis of firm’s need to maximize sales and also to sustain growth of sales.

Minimum profits are required either in the form of retained earnings or

new capital from the market. The firm also needs minimum profits to finance
future sales. Further, they are essential for a firm for paying dividends on
share capital and for meeting other financial requirements. Thus, minimum
profits serve as a constraint on the maximisation of a firm’s revenue.
“Maximum revenue will be obtained only” according to Baumol, “at an output
at which the elasticity of demand is unity, i.e. at which marginal revenue
is zero.”

This is the condition which replaces the “marginal cost equals

marginal revenue profit maximisation rule.” This is shown in Figure 5
where the profit maximisation firm produces OQ output where MC = MR at
point E. But the sales maximisation firm will produce OQ1 output where MR
is zero.
Baumol’s model is illustrated in Figure 6 where TC is the total cost
curve, TR the total revenue curve, TP the total profit curve and MP the
minimum profit or profit constraint line. The firm maximises its profits at OQ
level of output corresponding to the highest point В on the TP curve. But the
aim of the firm is to maximise its sales rather than profits. Its sales
maximisation output is OK where the total revenue KL is the maximum at the
highest point of TR.
 This sales maximisation output OK is higher than the profit
maximisation output OQ. But sales maximisation is subject to minimum
profit constraint. Suppose the minimum profit level of the firm is represented
by the line MP. The output OK will not maximise sales as the minimum profits
OM are not being covered by total profits KS. For sales maximisation the firm
should produce that level of output which not only covers the minimum
profits but also gives the highest total revenue consistent with it. This level is
represented by OD level of output where the minimum profits DC (=OM) are
consistent with DE amount of total revenue at the price DE/OD, (i.e., total
revenue/total output). Baumol’s model of sales maximisation points out that
the profit maximisation output OQ will be smaller than the sales
maximisation output OD, and price higher than under sales maximisation.

The reason for a lower price under sales maximisation is that both total
revenue and total output are equally higher while under profit maximisation
total output is much less as compared to total revenue. Imagine if QB is joined
to TR in Figure 6. “If at the point of maximum profit”, writes Baumol, “the firm
earns more profit than the required minimum, it will pay the sales maximiser
to lower his price and increase his physical output.”
Implications or Superiority of the Model:
Baumol’s sales maximisation model has some important implications
which make it superior to the profit maximisation model of the firm.

1. The sales maximising firm prefers larger sales to profits. Since it

maximises its revenue when MR is zero, it will charge lower prices than
that charged by the profit maximising firm. In Figure 43.5, the sales
maximisation price Q1P1 is lower than the profit maximisation price QP
which is determined when the MC curve cuts the MR curve at point E.
2. It follows from the above that the sales maximising output will be
larger than the profit maximising output. In Figure 43.4, the profit
maximisation firm produces OQ output while the sales maximisation
firm produces OQ1 output, OQ1 > OQ.
3. The sales maximiser would spend more on advertisement in order to
earn larger revenue than the profit maximiser subject to the minimum
profit constraint.

4. There may be a conflict between pricing in the short-run and long-

run. In the short-run, when output cannot be increased, revenue can
be increased by raising the price. But in the long- run, it would in the
interest of the sales maximisation firm to keep the price low in order to
 compete more effectively for a large share of the market to earn more
revenue.

5. The profit maximization firm is assumed to act rationally which goes

against the actual behaviour of firms. On the other hand, the Baumol
firm behaves satisfactorily for the purpose of earning minimum profits
at a fair sales maximization output.

Criticism:
Baumol’s sales maximisation model is not free from certain weaknesses.

1. Rosenberg has criticised the use of the profit constraint for sales
maximisation by Baumol. Rosenberg has shown that it is difficult to
specify exactly the relevant profit constraint for a firm. This is explained
in Figure 7. Sales revenue of the firm is measured along the vertical
axis and profit on the horizontal axis. R refers to the profit constraint.
For any two combinations with profits below the constraint, the one
with the larger profit will be preferred.

For instance, В on the profit level P is preferred to A at the profit level

P since the line P, represents a higher level of profit. Again, of the two
combinations В and С lying on the same profit line P , the one with
higher sales will be preferred, i.e., С will be preferred to B. Similar is
the case with points D and E on the constraint line R where E with
higher sales will be preferred to D. Thus it is very difficult to choose the
sales maximisation and minimum profit constraint in Baumol’s model.

2. According to Shepherd, under oligopoly a firm faces a kinked demand

curve and if the kink is large enough, total revenue and profits would
be the maximum at the same level of output. So both the sales
maximiser and the profit maximiser would not be producing different
levels of output.

3. Hawkins has shown that if the firm is engaged in any form of non-
price competition such as good packaging, free service, advertising, etc.,
Shepherd’s conclusions become invalid. When the sales maximiser
spends more on advertising, his output will be more than that of the
profit maximiser. This is because the kink of the former’s demand curve
will occur to the right of the kink of the profit maximiser.

4. Hawkins has also shown that Baumols’s conclusion that a sales

maximiser will in general produce and advertise more than a profit
maximiser, is invalid. According to Hawkins, a sales maximiser “may
choose a higher, lower or identical output, and a higher, lower or
identical advertising budget. It depends on the responsiveness of
demand to advertising rather than price cuts.”

5. In the case of multiproduct, Baumol has argued that revenue and

profit maximisation yield the same results. But Williamson has shown
that sale maximisation yields different results from profit maximisation.

6. Another weakness of this model is that it ignores the interdependence

of the prices of oligopolistic firms.

7. The model fails to explain “observed market situations in which price

are kept for considerable time periods in the range of inelastic demand.”

8. The model ignores not only actual competition, but also the threat of
potential competition from rival oligopolistic firms.

9. The model does not show how equilibrium in an industry, in which

all firms are sales maximisers, will be attained. Baumol does not
establish the relationship between the firm and industry.

10. Prof Hall in his analysis of 500 firms came to the conclusion that
firms do not operate in accordance with the object of sales
maximisation.
 Despite these criticisms, there is no denying the fact that sales
maximisation forms an important goal of firms in the present-day business
world.

The Dynamic Model of Sales Maximization

In the real world many changes take place which affects business
decisions of a firm. In order to include such changes, Baumol has developed
another dynamic model. This model explains how changes in advertisement
expenditure, a major determinant of demand, would affect the sales revenue
of a firm under severe competitions.

Assumptions of dynamic model:

1. Higher advertisement expenditure would certainly increase sales

revenue of a firm.
2. Market price remains constant.
3. Demand and cost curves of the firm are conventional in nature.

Generally, under competitive conditions, a firm in order to increase its

volume of sales and sales revenue would go for aggressive advertisements.
This leads to a shift in the demand curve to the right. Forward shift in
demand curve implies increased advertisement expenditure resulting in
higher sales and sales revenue. A price cut may increase sales in general. But
increase in sales mainly depends on whether the demand for a product is
elastic or inelastic.

A price reduction policy may increase its sales only when the demand is
elastic and if the demand is inelastic; such a policy would have adverse effects
on sales. Hence, to promote sales, advertisements become an effective
instrument today. It is the experience of most of the firms that with an
increase in advertisement expenditure, sales of the company would also go
up.
 A sales maximiser would generally incur higher amounts of advertisement
expenditure than a profit maximiser. However, it is to be remembered that
amount allotted for sales promotion should bring more than proportionate
increase in sales and total profits of a firm. Otherwise, it will have a negative
effect on business decisions. Thus, by introducing, a non-price variable in to
his model, Baumol makes a successful attempt to analyse the behaviour of a
competitive firm under oligopoly market conditions. Under oligopoly
conditions as there are only a few big firms competing with each other either
producing similar or differentiated products, would resort to heavy
advertisements as an effective means to increase their sales and sales
revenue. This appears to be more practical in the present-day situations.

Implications of Baumol’s Sales Revenue Maximization Model

▪ Implication of sales maximization theory of Baumol is that price would

be lower and output greater under sales maximization than under profit
maximization. This is because total and output revenue is maximized
at the price output level is positive where marginal revenue is zero,
while at the profit maximization level of output marginal revenue is
positive, given that marginal costs are positive.

▪ Under sales maximization with a minimum profit constraint, output will

be greater and price lower than under profit maximization objective. If
this is true that oligopolists seek to maximize sales or total revenue,
then the greater output and lower price will have a favourable effect on
the welfare of the people.

▪ As explained above, another implication of sales maximization objective

is more advertising expenditure will be declined under it.

▪ Further, under sales maximization objective of oligopolists, price is

likely to remain sticky and the firms are more likely to indulge in non-
price competition. This is what actually happens in oligopolistic market
situations in the real world.
▪ Another significance of Baumol’s Sales Revenue Maximization Model is
that there may be conflict between pricing in the long and short run. In
a short run situation where output is limited, revenue would often
increase, if prices were raised, but in the long run it might pay to keep
price low in order to compete more effectively for a large share of the
market. This price policy to be followed in the short run would then
depend on the expected repercussions of short run decisions on long
run revenue