Baumol’s Revenue Maximisation Model of Oligopolistic Behaviour Formulated By Prof. BaumolBaumol

Baumol argues that managers seek to maximize sales because of a fear that consumers may reject a product whose popularity is waning.

Financing may become more difficult to arrange and the firm might lose some of its distributors as sales decline. A declining firm loses some of its potential monopoly power.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Lastly, a smaller firm is probably more vulnerable to a generally depressed economy than a larger one. Up to some level of sales (where MC=MR) there is no necessary conflict between size and profits.

But Baumol asserts that there is a strong motive for managers to expand sales even beyond this point. For instance, McGuire has shown that managerial salaries are more closely related to firm size than to profitability.

For all those reasons Baumol says that revenue or sales maximisation subject to some minimum shareholder acceptable profit constraint, provides a better explanation of decision-making by oligopolist than does profit maximisation.

This may be illustrated by a mathematical example. Given the demand function P=4000—20Q and the total cost function TC=2000+400Q, we may calculate price, level of output and profit for a firm seeking to (1) maximise profits, (2) maximise total revenue and (3) maximise total revenue subject to a profit constraint.

x

Hi!
I'm Eddie!

Would you like to get a custom essay? How about receiving a customized one?

Check it out