Theories of the firm

Baumols Theory of Sales Revenue Maximization

Maximize sales revenue subject to minimum profit constraint Why sales revenue and not profits??
Sales are good general indicatof of organizational performance Executive power, influence, status tend to be linked to the sales performance Lenders tend to rely on sales data

Figure 3.1 Baumols sales revenue maximization model

Multiperiod version: Sales revenue depends on current sales revenue, annual rate of growth on sales revenue and discount rate. Figure 3.1 shows that short run profit maximization implies that sales revenue is lower than it could be By increasing output beyond its short run profit max. Level, the firm achieves an increase in current sales revenue

Marriss Theory of Growth Maximization

Baumol (1962); Marris (1964) and Williamson (1963) suggest that managers may pursue a strategy of maximum growth of the firm Strategy of max. Growth of firm :Max. Growth at the expense of firms future profit streams. Managers strive for growth rather than profit max. Growth of demand => advertising expenditures; further price reductions; extensive advertisements May be harmful due to:
Managerial constraint on growth Financial constraint on growth

Figure 3.2 Marriss growth maximization model

As the rate of growth of demand is increased, profitability is increased as well until a certain point. Then managerial constraints on growth tend to take place. The maximum growth of capital function shows the relationship between the firms rate of profit and the maximum rate at which the firm is able to increase its capital This model suggests several testable hypothesis one of which is: owner controlled firms achieve lower growth and higher profits.

Williamsons Theory of Managerial Utility Maximization

Baumols model view that managers interests are tied to a single variable: sales revenue. Williamson (1963) argue that several variables should be in the managers utility functrion U=U(S,M,ProfitD) U= Utility function S= Expenditure on staff (which leads to a higher prestige on behalf of the manager) M= Expenditure on managerial banefits (company car, fringe benefits, ..) ProfitD= Net profit (after tax and expenditure over and above the minimum level of profit required

Figure 3.3 Williamsons managerial utility maximization model

The Behavioral Theory of the Frm

Cyert and March (1964) Defines the firm in terms of its organizational structure and decision making processes Boundaries of the firm are loosely defined Bounded rationality (Simon (1959)) Satisficing behavior Due to observance of actual behavior within organizations