On Sales-Maximising and Oligopoly Behaviour

Abstract

Among recent and continuing attempts to solve the oligopoly problem -that is, to provide a determinate model of oligopoly behaviour which can be meaningfully related both to the traditional theory of the firm and to general theory of market determination of price and output-one of the most promising has been Professor Baumol's theory of oligopoly .2 This approach is based on the hypothesis that oligopolist firms maximise their total dollar sales rather than their total profits, subject to a minimum profit constraint. His theoretical analysis of the behaviour of firms motivated in this way enables Baumol to derive some interesting conclusions about multiproduct firms, advertising and service competition, and the influence of overhead costs upon output. In addition he derives the general conclusion that, by maximising sales rather than profits, oligopolists' price-output decisions will conform to welfare criteria of efficient allocation more closely than is commonly thought. One hesitates to raise questions about so fruitful an analysis as this, especially since, as Baumol points out, it seems to fit and explain some important problems of business motivation and behaviour which the orthodox theory of the firm has never been able to handle satisfactorily. Baumol's most recent presentation of this approach minimises its claims to explain oligopoly behaviour.3 But it needs to be explicitly stated that this approach gives only a specialised theory of the salesmaximising firm rather than a general theory of oligopoly . This article is intended simply to dispel any lingering notion that salesmaximisation can explain the behaviour of the firn in conditions of oligopoly as this term is customarily defined, that is, where interdependence in decision-making is present in a group of rival firms.