Implications of Baumol’s Sales Revenue Maximization Model

Implication of sales maximization theory of Baumol is that price would be lower and output greater under sales maximization than under profit
maximization. This is because total and output revenue is maximized at the price output level is positive where marginal revenue is zero,
while at the profit maximization level of output marginal revenue is positive, given that marginal costs are positive. Under sales maximization
with a minimum profit constraint, output will be greater and price lower than under profit maximization objective. If this is true that oligopolists
seek to maximize sales or total revenue, then the greater output and lower price will have a favorable effect on the welfare of the people.

As explained above, another implication of sales maximization objective is more advertising expenditure will be declined under it. Further,
under sales maximization objective of oligopolists, price is likely to remain sticky and the firms are more likely to indulge in non price
competition. This is what actually happens in oligopolistic market situations in the real world. Another significance of Baumol’s Sales
Revenue Maximization Model is that there may be conflict between pricing in the long and short run. In a short run situation where output is
limited, revenue would often increase, if prices were raised, but in the long run it might pay to keep price low in order to compete more
effectively for a large share of the market. This price policy to be followed in the short run would then depend on the expected repercussions
of short run decisions on long run revenue.