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The
Owners
shareholders
Board of directors
Top
Management
Assumption
1.
2.
3.
4.
5.
6.
7.
fulfill consistently over time and at a same level. Profits may fluctuate
with changing conditions.
Sixth, growing sales strengthen competitive spirit of the firm in the
3.
4.
5.
6. The model ignores not only actual competition, but also the threat of
potential competition from rival oligopolistic firms.
7. The model does not show how equilibrium in an industry, in which all
firms are sales maximizes, will be attained. Baumol does not establish
the
relationship between the firm and industry.
8. Professor hall in his analysis of 500 firms came to the conclusion that
firms do not operate in accordance with the objective of sales
maximization.
Marriss hypothesis
According to robin marris, managers maximize firms balanced growth
supply of capital
to its firm increase at the same rate. The two growth rates are
according to marris,translated into two utility functions:1) managers
utility function and 2) owners utility function
The managers utility function(Um) and owner's Utility function( Uo) may
be specified as follows.
Um=f(salary,power,job security,prestige,status)
Uo =f(output,capital,market-share,profit,public esteem)
Model highlights two important factors as far as management is
concerned: the attitude to risk and uncertainty and the desire for utility
which may not be maximised by the pursuit of maximum profits.
Owners utility function may be written as
U0 = f *(gc)
where gc = rate of growth of capital.
s can be measured by a weighted average of three ratios: the liquidity ratio, the
leverage debt ratio and the profit-retention ratio.
1.
2.
3.
=Value of debt/
Total assets
Too low liquidity ratio may lead to insolvency and bankruptcy and there is a
threat of take-over in case it being too high.
Too low Retention ratio may upset shareholders and too high ratio may inhibit
growth.
2.
3.
4.
Marris assumes a given price structure for the firms.he therefore, does not
explain how prices of products determined in the market.this is a serious
weakness of his model
Another defect of this model is that it ignores the problem of oligopolistic
interdependence of firms in non-collusive market.
This model also does not analyse interdependence created by non-price
competition.
The model assumes that firms can grow continously by creating new
products. This unrealistic because no firm can sell anything to the
consumers.After all,consumers have their preferences for certain brands
which also change when new products enter the market.
5.
6.
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8.
9.
Williamsons model
A
Assumptions
Market is non perfectly competitive
Ownership of the firm and management of the firm are divorced from each
other
U=f(S,M,ID)
Where,S is staff expenditure(including managerial salaries,the
administrative and sellingexpenses),M depicts managerial emoluments
and Id is discretionary investment.
Criticism of Williamsons Model
1. He does not clarify the basis of the derivation of his feaibility curve.in
particular,he fails to indicate the constriant in the profit staff relation
in the feasibility curve.
2. He lumps together staff and manager emoluments in the utility
curve.
3. This theory not deals with oligopolistic interdependence and of
oligopolistic rivalary.
theory.
Unlike managerial theories,behavioural theories view the firm as
engaged in non- maximizing behavior.
According to behavioral theories, the firms sub-optimal behavior arises
from uncertainty and conflicting goals of various groups within the
firm
Behavioral theory analyse the organization of the firm,the way in which
decisions are reached,and the inter-group conflicts within the
organization.
Thus while managerial theories emphasize the role of management,the
behavioural theories argue tahat groups within the firm other than
managers influence the behavioue of the firm.
3.
4.
Agency Theory
There has been a new development in the theoretical analysis of the firm which