Alternative Theories

of the Firm

Problems with Traditional Theory

� Difficulties in maximising profit� non-use of opportunity cost� difficulties in identifying demand & MR� difficulties in deciding the time period for

maximising profit

� Alternative aims� separation of ownership and control� the principal–agent problem� managerial utility maximisation� profit satisficing

Alternative Maximising Theories

� Long-run profit maximisation� implications for investment and short-run

pricing and output� difficulties in testing the theory

� Managerial utility maximisation� factors determining managers’ utility

� salary� security� dominance� professional excellence

� implications for firms’ behaviour� importance of economic environment

Alternative Maximising Theories

� Sales revenue maximisation (short run)

� equilibrium output and price

Sales revenue maximising output£

QO

TR

£

QO

TR

Q1

Sales revenue maximising output

£

QO

TC

TR

Q1

Sales revenue maximising output

£

QO

TC

TR

Q2 Q1

Sales revenue maximising output

Alternative Maximising Theories

� Sales revenue maximisation (short run)� equilibrium output and price

� effect of a minimum profit constraint

£

QO

Π

TC

TR

Q2 Q1Q3

Total profit

Sales revenue maximising with a profit constraint

Alternative Maximising Theories

� Sales revenue maximisation (short run)� equilibrium output and price

� effect of a minimum profit constraint

� implications for advertising

Alternative Maximising Theories

� Sales revenue maximisation (short run)� equilibrium output and price

� effect of a minimum profit constraint

� implications for advertising

� comparisons with short-run profit maximising

Alternative Maximising Theories

� Sales revenue maximisation (short run)� equilibrium output and price

� effect of a minimum profit constraint

� implications for advertising

� comparisons with short-run profit maximising

� implications for the consumer

Alternative Maximising Theories

� Sales revenue maximisation (short run)� equilibrium output and price

� effect of a minimum profit constraint

� implications for advertising

� comparisons with short-run profit maximising

� implications for the consumer

� assessment of the theory

Alternative Maximising Theories

� Growth maximisation

� measuring ‘growth’

� equilibrium for growth maximising firm?

� Alternative theories and the consumer

Multiple Aims

� Satisficing and the setting of targets� various possible targets� potential conflicts between targets

� Behavioural theories of the firms� the nature of behavioural theories:

descriptive� target setting� target conflict and search procedures� organisational slack

Multiple Aims

� Predictions of behaviour

� conservatism

� comparison with other firms

� Satisficing and the consumer’s interest

� advantages

� disadvantages