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A GENERALIZED THEORY OF THE FIRM: AN INTEGRATION OF THE SALES AND PROFIT MAXIMIZATION HYPOTHESES *
Author(s) -
Brown Murray,
Revankar Nagesh
Publication year - 1971
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.1467-6435.1971.tb00612.x
Subject(s) - marginal profit , profit maximization , economics , marginal revenue , revenue , marginal product , microeconomics , profit (economics) , marginal cost , econometrics , maximization , marginal utility , econometric model , production (economics) , accounting
SUMMARY A generalized model of the firm is presented, which considers two goals of the firm (profits and revenue) rather than profits alone. It is assumed that the firm maximizes a utility function containing profits and revenue variables as arguments and hence our model is more general than B aumol's constrained‐sales‐maximization (CSM) model. The system can be extended to include additional goals in a straightforward manner. With respect to the profits and sales utility maximization model, it is shown that, if the marginal utility of revenue is positive‐and regardless of the form of the utility function, (a) the product price is not likely to be less than the competitive price under profit‐maximization, (b) the marginal products of the factors are forced down below the neoclassical level in the same proportion , for given degrees of market‐imperfections, (c) the marginal rate of substitution equilibrium conditions are identical to those derived under profit‐maximization, (d) labor and capital incomes are benefited at the expense of the owners of the firm, etc. The model lends itself to empirical estimation and econometric testing. In fact, firms' goal structures are estimable (provided the form of the utility function is specified) if one uses the marginal productivity equilibrium relationships. If the marginal rate of substitution equilibrium relationships form the basis of the econometric specifications, then goal structures are not estimable but production and market condition‐type phenomena are estimable. Hence our approach is heuristic in that it provides a clear guide to research strategy.