BAUMOL’S SALES MAXIMISATION,

W.J. BAUMOL’S SALES MAXIMISATION

(Without Advertisement)

Baumol’s findings of oligopoly firms in America reveal that they follow the sales maximization objective. According to Baumol, with the separation of ownership and control in Morden Corporation, 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 3 million $’’. Thus, according to Baumol, revenue or sales maximization rather than profit maximization is consistent with the actual behavior of firms.

Baumol cites evidence suggesting that shot-run revenue maximization may be consistent with long-run profit maximization. But sales maximization is regarded as the short-run and long-run goal of management. Sales maximization is not only a means but an end in itself. He gives a number of arguments is the 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 the 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 their unpopularity. But if sales are large, the size of the firms expands which, in turn, larger profits.

Baumol’s model is illustrated in fig. 1 where TC is the total cost curve, TR is the total revenue curve, TP is total production curve and MP is the minimum profit constraint line. The firm maximizes its profits at the OQ level of the output corresponding to the highest point B on the TP curve. But the aim of the firm is not maximize the profit but it want to maximize the sales. Its sales maximization output is OK where the total revenue KL is the maximum at the highest point of the TR. This sales maximization output OK is higher than the profit maximization output OQ. But sales maximization is subject to minimum profit constraints.

(Sales maximization model without advertisement.)

Suppose the minimum profit level of the firm is represented by the line MP. The output OK will not maximize sales as the minimum profit OM are not being covered by total profit KS. For sales maximization, the firm should produce profit but also gives the highest total revenue consistent with it. This level is represented by the OD level of output where the minimum profit is DC (=OM) are consistent with DE amount of total revenue at the price DE/OD, (I.e., total revenue /total output).

Criticism:

The sales maximization objective of the firms has been criticized on a number of points. First, Rosenberg criticized the use of the profit constraint for maximizing sales. He has shown that it is difficult to specify exactly the relevant profit constraint for a firm, and choose the sales maximization and minimum profit constrain in Baumol’s analysis. Second, if expenditure on advertising is introduced in a Baumol’s theory, the likelihood of sales maximization is increased. But this view point is not realistic because the expenditure on advertising increase or decrease with the rise of fall in output. Third, the objective of sales maximization 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, sales maximization is an important objective being pursued by business firms.