Evaluation of Baumol's Model

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Introduction Generally in business, there is a trade-off between selling many units at a low price and selling only a few units at a high price. There are different managerial models in a firm embodying different assumptions like the Profit Maximization Model which is a traditional model, the Marris Model, the Williamson Model and the Baumol Model. This write-up will focus on understanding management preferences in terms of price, revenue and profit maximization, critically evaluate the management model of Baumol and review the extent to which the Baumol model provides a more useful insight into pricing and output decisions of modern management.…show more content…
In this respect, certain characteristics are identifiable about the internal and external processes involved for organizations within such markets. Baumol recognizes that since it is large organizations that are most likely to be competitors within an oligopoly, then the chains of control and decision making are likely to be elongated. It is therefore considered that more likely that it will take longer to arrive at and implement decisions within such organizations than within smaller competitors. Within the market, it is claimed that there is tacit collusion between organizations to maintain the status quo. These incumbents, once the oligopoly has settled down into an equilibrium position, are able to enjoy a quiet life and split the profits between them. Additionally, there may be a general lack of interest on the part of organizations to compete in their markets unless actions are undertaken by others to upset the current situation. Other justifications for the sales revenue maximization model include: • The imposition of a minimum profit constraint on management by shareholders ensures that their concerns are met, while it would be more difficult to set and measure a maximum requirement. • Increasing level of sales are

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