Baumol’s theory of sales revenue maximization was created by American economist William Jack Baumol. It’s based on the theory that, once a. W. J. Baumol suggested sales revenue maximisation as an alternative goal to profit maximisation.1He presented two basic models: the first is a static. W. J. Baumol suggested sales revenue maximisation as an alternative goal to profit maximisation.1 He presented two basic models: the first is a static.
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Yet there are so many variables that affect demand over time that econometric studies of individual demand functions become extremely tedious and mostly unreliable.
Thus for any two products X i and X j we have. This is the same condition ervenue the one for model 3. The firm is in equilibrium when it reaches the highest point of this curve. This is shown in figure It is the dotted curve in figure The sales-maximisation theory does not show how equilibrium in an industry, in which all firms are sales maximisers, will be attained. Baumol claims that because in his model output will be larger than the output of a profit maximiser, the sales-maximisation hypothesis implies a lower degree of misallocation of resources and hence an increase in the welfare of the society.
Thus profits will be the main source for financing the rate of growth of sales revenue. The sales maximiser would spend more on advertising in order to earn saoes revenue than the profit maximiser subject to the minimum profit constraint.
The interrelationship between output and advertising and in particular the assumed positive marginal revenue of advertising permits us to see clearly that an unconstrained sales maximisation is ordinarily not possible. See the Haveman-DeBartolo version of the sales-maximisation model. However, output may be lower salss price higher in the new equilibrium, depending on the shift and the elasticity of the demand curve following advertising, as well as on the cost conditions of the firm.
By assigning different values to S and repeating the above process we may obtain a set of S curves. The minimum profit constraint is exogenously determined by the demands and expectations of the shareholders, the banks and other financial institutions.
However, such data are not disclosed by firms to researchers, and are commonly unknown to the firms.
Baumol’s Managerial Theory of Sales Revenue Maximization
Leave a Reply Click here to cancel reply. The sales-maximisation hypothesis cannot be tested against competing behavioural hypotheses unless the demand and cost functions of individual firms are measured. But Hawkins has shown that if the firm maximizatiln engaged in any form of non-price competition such as good packaging, free service, advertising, etc.
Thus Baumol rules out interdependence ex hypothesi, and hence his theory cannot explain the core problem of uncertainty in non-collusive oligopoly markets. In the short run when output cannot be increased, revenue can be increased by raising the price. Minimum profits are required either in the form maximizatino retained earnings or new capital from the market. Since the products compete for the resources of the firm, the closer to the origin an isoprofit curve is the higher the level of profit it depicts.
TR is the total revenue curve.
If we assume that the firm has a given amount of resources and given costs C and wants to allocate them among the various commodities it produces so as to maximise sales revenue, it will reach the same equilibrium solution as the profit maximiser, that is, it will produce the same quantities of the various products as if it were a profit maximiser.
On a priori grounds that is, if firms were sales maximisers Hall expected a strong positive relationship between sales revenue changes and the deviation of actual from the desired profit that is, the estimated profit constraintsince a positive departure of actual profits from the minimum acceptable level would induce the firms to pursue policies which increase sales revenue. Advertising outlay is measured on the horizontal axis and the advertising function is shown as a 45 line.
Baumol does not establish the relationship between the firm and industry.
A similar analysis holds for an increase in the variable cost. The firm must realize a minimum level of profits to keep shareholders happy and avoid a fall of the prices of shares on the stock exchange.
Baumol’s Sales Revenue Maximization Model
Consequently the highest attainable growth rate g will be at maxikization point of maximum profits. However, this is inconsistent with what Baumol states elsewhere p. If the firm is a profit maximiser the imposition of the lump-sum tax will not affect the price and output in the short run the profit maximiser will bear the whole burden of the lump-tax. Maixmization increase in variable costs will lead the sales maximiser to an increase in price and a reduction in output.
The theory ignores not only actual competition, but also the threat of potential competition. Sales Maximisation Model of Oligopoly — Explained! This condition states that revenu marginal revenue of advertising commodity i must be equal to the marginal revenue of advertising commodity j. With advertising taking place the kinked-demand curve of a profit maximiser will be closer to the origin than the kinked curve of a sales maximiser, because the latter indulges in heavier advertising expenditures.