242 WESTERN ECONOMIC JOURNAL

SALES MAXIMIZATION VS. PROFIT MAXIMIZATION: ARE THEY CONSISTENT?: COMMENT

WILLIAM J. BAUMOL PRINCETON UNIVERSITY

In an interesting note [l], Professor B. D. Mabry asks whether profit and sales maximization necessarily lead the firm to adopt different courses of action and comes to the condusion that they need not. Hence, he implies, the sales maximization hypothesis may not be able to explain anything that is not already accounted for by the received theory of the firm. I have no desire to take direct issue with him but I would iike to offer two clarifying comments:

1. No doubt my exposition is largely at fault, but I never intended to imply that all oligopoly firms do, will continue to, or should maximize sales. Rather, I have argued that they do not all seek to maximize profits and that this is in no way irrational. Sales maximization or growth maximization were merely intended as illustrations based on the observed behavior of firms with which I had worked closely. My intended contribution was not the substitution of one inflexible generalization for another, but the demonstration that alternative hypotheses about business objec- tives were just as easily subjected to rigorous analysis as is the conventional profit maximization model.

riori, envision configurations of cost and

And I sus ed that there are some cases in reality in which they actually do. But Pro- fessor Ma g ry’s challenge becomes serious only if he can offer evidence that they always or at least usual1 are indistinguishable in their consequences, for otherwise there will remain a su l stantial sector of the business community for which the sales hypothesis does have some explanatory power. Whether the two hypotheses do always (or usually) imply the same behavior is ultimately an empirical question, and we have been offered no empirical evidence on the matter. I believe, however, that it is easy to provide some important counterexamples, cases in which a profit goal does not duplicate the r e d $ of a sdes objective. Thus, the evidence, such as it is, suggests that the demands for many oligopoly outputs (for example, medicines) are inelastic. How can profit maximization explain anything about the behavior of such items? And what about the public utilities whose profits are regulated? Do they choose randomly among all the alternative decisions that promise to meet the profit ceiling or does an alternative maximand help to explain their behavior ?

REFERENCE 1. Bevan D. Mabry, “Sales Maximization vs. Profit Maximization: Are They Inconsistent?”,

REPLY

2. I wiIl not deny that one can, u revenue functions in which the sales an c f profit hypotheses lead to the same results.

WeJtem Eron. Jour., March 19668, 6, 15460.

BEVARS D. MABRY BOWLING GREEN STATE UNIVERSITY

Although it seems that Professor Baumol and I are in agreement that the two types of maximizing behavior, neither of which may be an end in itself, may be consistent with one another,l there appears to be some difference in opinion on the relative importance of each in a normative sense. If I may paraphrase a sentence under the second point in his Comment: “But Professor Baumol’s chdlenge becomes serious

With respect to public utilities, is it not the profit rate rather than the level of profits which is regulated? On the surface it would xem for the regulated industries that a desire to earn a greater level of profits (although not necessarily a higher rate) is quite consistent with asset and sales growth. In fact, given the regulation, the latter may be a primary means of earning larger PrnfitS.