Prof. Baumol has put forth a model of oligopolistic behaviour which assumes that firms seek to maximise sales rather than profits. Baumol’s model ignores interdependencies in decision-making among oligopolists.
Based on his own experience as a consultant economist, Baumol argues that interdependencies are practically ignored in all decision-making, except in such instances when major price reductions are made, radically new products are being introduced or large new advertising campaigns are launched.
This argument is supported by his observations of the complex and slow-moving internal decision-making apparatus in most firms and the desire of corporate managers not to rock the competitive boat—to live and let live.
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Baumol argues that managers seek to maximize sales because of a fear that consumers may reject a product whose popularity is waning.
Financing may become more difficult to arrange and the firm might lose some of its distributors as sales decline. A declining firm loses some of its potential monopoly power.
Lastly, a smaller firm is probably more vulnerable to a generally depressed economy than a larger one. Up to some level of sales (where MC=MR) there is no necessary conflict between size and profits.
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But Baumol asserts that there is a strong motive for managers to expand sales even beyond this point. For instance, McGuire has shown that managerial salaries are more closely related to firm size than to profitability.
For all those reasons Baumol says that revenue or sales maximisation subject to some minimum shareholder acceptable profit constraint, provides a better explanation of decision-making by oligopolist than does profit maximisation.
This may be illustrated by a mathematical example. Given the demand function P=4000—20Q and the total cost function TC=2000+400Q, we may calculate price, level of output and profit for a firm seeking to (1) maximise profits, (2) maximise total revenue and (3) maximise total revenue subject to a profit constraint.