BAUMOLS SALES REVENUE MAXIMIZATION

MODEL
W.J.Baumol suggested sales revenue maximization as an alternative goal
to profit maximization. He presented two basic models:
a) The first is a static period model.
b) The second is a multi period dynamic model of growth of sales
revenue maximization.
RATIONALISATION OF THE SALES MAXIMIZATION HYPOTHESIS
a) There is evidence that salaries and other earnings of top managers
are correlated more closely with sales than with profits.
b) 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.
c) 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.
d) Large sales, growing over time, give prestige to the managers, while large
profits go into the pockets of shareholders.
e) 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.
f) 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-à-vis rivals.
BAUMOLS STATIC MODELS
The basic assumptions of the static models
1. The time horizon of a firm is a single period.
2. During this period the firm attempts to maximize its total sales revenue
subject to a profit constraint.
3. 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.
4. Baumol accepts that cost revenues are U-shaped and the demand
curve of the firm is downward sloping.

• A single product model, without advertising.

• A single product model, with advertising.
• A multiproduct model, without advertising.
Model 1. A single product model, without advertising

Model 2. A single product model, with advertising

Model 3. A multiproduct model, without advertising

BAUMOLS DYNAMIC MODELS
The most serious weakness of the static model is the short time horizon of
the firm and the treatment of the profit constraint as an exogenously
determined magnitude. In the dynamic model the time horizon is
extended.
The basic assumptions of the dynamic models are
1. The firm attempts to maximize the rate of growth of sales over its
lifetime.
2. Profit is the main means of financing growth sales.
3. Demand is downward falling and costs are U-shaped.

Profit is not a constraint but an instrumental variable, a means whereby the

top management will achieve its goal of a maximum rate of growth of
sales.
 MARRIS’S MODEL OF THE MANAGERIAL
ENTERPRISE
I. GOALS OF THE FIRM
The goal of the firm in Morris model is the maximization of the balanced
rate of growth of the firm, that is, the maximization of the rate of
growth of demand for the products of the firm, and of the growth
of its capital supply:
Maximize g = gD = gC
Where, g= balanced growth rate.
gD=growth of demand for the products of the firm.
gC=growth of the supply of capital.
Managers set their goals which do not necessarily coincide with those of
owners. The utility function of the managers includes variables
such as salaries, status, power and job security, while the utility
function of owners includes variables such as profits, size of
capital, share of the market and public image. Thus managers
want to maximize their own utility.
UM = f (salaries, power, status, job security)
While the owners seek the maximization of their utility.
UO= f* ( profits, capital, output, market share, public esteem).

Morris argues that the difference between the goals of managers and
the goals of the owners is not so wide, because most of the
variables appearing in both functions are strongly correlated with a
single variable: the size of the firm.
U owners= f * (gc)
Where gc= rate of growth of capital
The managerial utility function is
UM = f (gD, s)
Where, gD= rate of growth of demand for the products of the firm.
s= a measure of job security