Outline the Critical Assumptions of the Baumol Model. in Your Reply, Identify What You Would Regard as the Key Contributions of the Model to Managerial Economics. Is the Model of Direct Relevance to Modern Management Decision Making?
Key Concepts:
- Focus on pricing to maximise revenues and volumes
- Separation of ownership and control
- Principal Agent – Highlighted in the 1930’s
- Shareholders may incentivise management
- Revenue maximisation – why this?
- Total revenue test
- Price elasticity = Baumol Q
- Trigger Price
- A strategy set is a string of moves
- Neo-classical (market – cost minimisation) vs Managerial model of firm (visible hand of management)
- Type influences behaviour = seeking to maximise some objective (indifference curve)
- Personal satisfaction
- A trade off
- Management type distilled from behavioural characteristics that can be both identified and observed
- Profit Maximisation Assumptions: - Perfect Knoweledge (companies do not have the information that traditional theory assumes).
Rational Models
Maximise Profit
Examples:
- ?
Answer:
1. Intro
a. Behavioural management models provide an alternative view to neo-classical
b. By identifying the influence of managerial behaviour we are able to develop a more complete analysis of a firms strategy
c. The Baumol model rationalises management that focusses on revenue maximisation at the expense of profit maximisation, and this forms the central key assumption of the model
d. Models like the Baumol model are of significant value in the economic analysis of a modern firms strategy
2. Management behaviour and type
a. Neo-classical vs modern behavioural management models
b. Management display type through behaviour and characteristics
c. Development of a strategy set
3. Separation of ownership and control
a. By accepting that management have a type, it is realised that they may behave in a manner that is not directly aligned with the owners objectives (1959)
b. Personal satisfaction
c. Principal agent dilemma
4. Revenue maximisation – Why specifically this? Revenue Maximisation test
a. Compare profit max vs revenue max – trade off
b. Why revenue max, what are the motives
c. Baumol Model
- Focus on pricing to maximise revenues and volumes
- Separation of ownership and control
- Principal Agent – Highlighted in the 1930’s
- Shareholders may incentivise management
- Revenue maximisation – why this?
- Total revenue test
- Price elasticity = Baumol Q
- Trigger Price
- A strategy set is a string of moves
- Neo-classical (market – cost minimisation) vs Managerial model of firm (visible hand of management)
- Type influences behaviour = seeking to maximise some objective (indifference curve)
- Personal satisfaction
- A trade off
- Management type distilled from behavioural characteristics that can be both identified and observed
- Profit Maximisation Assumptions: - Perfect Knoweledge (companies do not have the information that traditional theory assumes).
Rational Models
Maximise Profit
Examples:
- ?
Answer:
1. Intro
a. Behavioural management models provide an alternative view to neo-classical
b. By identifying the influence of managerial behaviour we are able to develop a more complete analysis of a firms strategy
c. The Baumol model rationalises management that focusses on revenue maximisation at the expense of profit maximisation, and this forms the central key assumption of the model
d. Models like the Baumol model are of significant value in the economic analysis of a modern firms strategy
2. Management behaviour and type
a. Neo-classical vs modern behavioural management models
b. Management display type through behaviour and characteristics
c. Development of a strategy set
3. Separation of ownership and control
a. By accepting that management have a type, it is realised that they may behave in a manner that is not directly aligned with the owners objectives (1959)
b. Personal satisfaction
c. Principal agent dilemma
4. Revenue maximisation – Why specifically this? Revenue Maximisation test
a. Compare profit max vs revenue max – trade off
b. Why revenue max, what are the motives
c. Baumol Model