Alternative Theories

of the Firm

Problems with Traditional TheoryProblems 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 TheoriesAlternative 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

salarysecuritydominanceprofessional excellence

implications for firms’ behaviour importance of economic environment

Alternative Maximising TheoriesAlternative Maximising Theories

Sales revenue maximisation (short run) equilibrium output and price

Sales revenue maximising outputSales revenue maximising output£

QO

TR

£

QO

TR

Q1

Sales revenue maximising outputSales revenue maximising output

£

QO

TC

TR

Q1

Sales revenue maximising outputSales revenue maximising output

£

QO

TC

TR

Q2 Q1

Sales revenue maximising outputSales revenue maximising output

Alternative Maximising TheoriesAlternative Maximising Theories

Sales revenue maximisation (short run) equilibrium output and price

effect of a minimum profit constraint

£

QO

TC

TR

Q2 Q1Q3

Total profit

Sales revenue maximising with a profit constraintSales revenue maximising with a profit constraint

Alternative Maximising TheoriesAlternative Maximising Theories

Sales revenue maximisation (short run) equilibrium output and price

effect of a minimum profit constraintimplications for advertising

Alternative Maximising TheoriesAlternative Maximising Theories

Sales revenue maximisation (short run) equilibrium output and price

effect of a minimum profit constraintimplications for advertisingcomparisons with short-run profit

maximising

Alternative Maximising TheoriesAlternative Maximising Theories

Sales revenue maximisation (short run) equilibrium output and price

effect of a minimum profit constraintimplications for advertisingcomparisons with short-run profit

maximising

implications for the consumer

Alternative Maximising TheoriesAlternative Maximising Theories

Sales revenue maximisation (short run) equilibrium output and price

effect of a minimum profit constraintimplications for advertisingcomparisons with short-run profit

maximising

implications for the consumer assessment of the theory

Alternative Maximising TheoriesAlternative Maximising Theories

Growth maximisation

measuring ‘growth’

equilibrium for growth maximising firm?

Alternative theories and the consumer

Multiple AimsMultiple 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 AimsMultiple Aims

Predictions of behaviour

conservatism

comparison with other firms

Satisficing and the consumer’s interest

advantages

disadvantages