Alternative Theories Of The Firm

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 ✦ effect

output and price

of a minimum profit constraint

Sales revenue maximising with a profit constraint £

TC

TR

Π O

Q2

Q

Q3 Q1 Total profit

Alternative Maximising Theories ■ Sales

revenue maximisation (short run)

✜ equilibrium ✦ effect

output and price

of a minimum profit constraint

✦ implications

for advertising

Alternative Maximising Theories ■ Sales

revenue maximisation (short run)

✜ equilibrium ✦ effect

output and price

of a minimum profit constraint

✦ implications

for advertising

✦ comparisons

with short-run profit

maximising

Alternative Maximising Theories ■ Sales

revenue maximisation (short run)

✜ equilibrium ✦ effect

output and price

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 ✦ effect

output and price

of a minimum profit constraint

✦ implications

for advertising

✦ comparisons

with short-run profit

maximising

✜ implications ✜ assessment

for the consumer

of the theory

Alternative Maximising Theories ■ Growth

maximisation

✜ measuring

‘growth’

✜ equilibrium

■ Alternative

for growth maximising firm?

theories and the consumer

Multiple Aims ■ Satisficing ✜ various

and the setting of targets

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

■ Satisficing

with other firms

and the consumer’s interest

✜ advantages ✜ disadvantages