Alternative Theories of the Firm

Problems with Traditional Theory n Difficulties in maximising profit < non-use of opportunity cost < difficulties in identifying demand & MR < difficulties in deciding the time period for maximising profit n Alternative aims < separation of ownership and control < the principal–agent problem < managerial utility maximisation < profit satisficing

Alternative Maximising Theories n Long-run profit maximisation < implications for investment and short-run pricing and output < difficulties in testing the theory n Managerial utility maximisation < factors determining managers’ utility F salary F security F dominance F professional excellence < implications for firms’ behaviour < importance of economic environment

Alternative Maximising Theories n Sales revenue maximisation (short run) < equilibrium output and price

Sales revenue maximising output £ Q O TR

£ Q O Q1Q1 Sales revenue maximising output

£ Q O TC TR Q1Q1 Sales revenue maximising output

£ Q O TC TR Q2Q2 Q1Q1 Sales revenue maximising output

Alternative Maximising Theories n Sales revenue maximisation (short run) < equilibrium output and price F effect of a minimum profit constraint

£ Q O  TC TR Q2Q2 Q1Q1 Q3Q3 Total profit Sales revenue maximising with a profit constraint

Alternative Maximising Theories n Sales revenue maximisation (short run) < equilibrium output and price F effect of a minimum profit constraint F implications for advertising

Alternative Maximising Theories n Sales revenue maximisation (short run) < equilibrium output and price F effect of a minimum profit constraint F implications for advertising F comparisons with short-run profit maximising

Alternative Maximising Theories n Sales revenue maximisation (short run) < equilibrium output and price F effect of a minimum profit constraint F implications for advertising F comparisons with short-run profit maximising < implications for the consumer

Alternative Maximising Theories n Sales revenue maximisation (short run) < equilibrium output and price F effect of a minimum profit constraint F implications for advertising F comparisons with short-run profit maximising < implications for the consumer < assessment of the theory

Alternative Maximising Theories n Growth maximisation < measuring ‘growth’ < equilibrium for growth maximising firm? n Alternative theories and the consumer

Multiple Aims n Satisficing and the setting of targets < various possible targets < potential conflicts between targets n Behavioural theories of the firms < the nature of behavioural theories: descriptive < target setting < target conflict and search procedures < organisational slack

Multiple Aims n Predictions of behaviour < conservatism < comparison with other firms n Satisficing and the consumer’s interest < advantages < disadvantages