Baumol’s Theory of Sales Maximization:-

This theory is an important alternative theory of the firms’ behavior and the basic premise of the
theory is sales maximization rather than profit maximization. He argues that there is no reason to
believe that all firms seek to maximize their profit. Business firms pursue a number of
incompatible goals and easily single out the most common objective. He says that most of the
managers seek to maximize sales revenue rather than profits. He argues that in modern business
management is separated from ownership and enjoys discretion to pursue goals other than profit
maximization.
Reasons for pursuing sales maximization rather than profit maximization:
1) Financial institutions consider sales as an index of performance of the firm and are
willing to finance the firm with growing sales.
2) While profit figures are available only annually periodic sales figures can obtain easily
and more frequently to assess performance of management. Maximization of sales is
more satisfying for managers than profits.
3) The routine evaluation of management’s performance, salaries and slack earnings of top
managers are linked more closely to sales than to profit. Higher payments may be offered
to employees if sales figures indicate better performance. To rely on profit figures means
long waiting period as profits are known only at the end of the year.
4) If the profit maximization is the goal and it raises in one period at an unusual level this
become the standard profit target for shareholders’ which managers find it difficult in the
long run.
5) Sales growing more than proportionately to market expansion, indicates growing market
share and a greater competitive advantage.
Criticism:-
1) Baumol’s theory does not distinguish between firms equilibrium and industry
equilibrium.
2) It does not clearly bring out the implications of interdependence of firms price and output
decision. Baumol’s theory ignores not only actual competition between the firms but also
the threat of potential competition in an oligopolistic market.
3) Baumol claims that his solution is preferable to the solution offered by the conventional
theory from social welfare point of view is not necessarily valid.