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
£

TR

O Q
 Sales revenue maximising output
£

TR

O Q1 Q
 Sales revenue maximising output
£
TC

TR

O Q1 Q
 Sales revenue maximising output
£
TC

TR

O Q2 Q1 Q
Alternative Maximising Theories
■ Sales revenue maximisation (short run)
✜ equilibrium output and price
✦ effect of a minimum profit constraint
Sales revenue maximising with a profit constraint
£
TC

TR

Π
O Q
Q2 Q3 Q1
Total profit
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
✜ thenature 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