When Sales Maximization is Profit-Maximizing: A Two-Stage Game

Tom Ross ()
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Tom Ross: University of British Columbia, http://economics.ubc.ca/

Carleton Industrial Organization Research Unit (CIORU) from Carleton University, Department of Economics

Abstract: This paper attempts to revive in the sales maximization hypothesis by providing that there are conditions under which such an objective can be profitable. Competition is modelled as a two-stage game. In the first stage owners write contracts with managers instructing them on whether to maximize sales, profits or some combination. In the second stage, the managers play a Cournot quantitiy game selecting outputs to maximize the chosen objective function. In such a game, sales maximization represents a more aggressive strategy that can enlarge a firm's market shar and may or may not increase its profits. When the objective is to mazimize a weighted sum of profits and sales, pure profit maximization (i.e. putting all the weight on profits) never proves optimal.

Pages: 22 pages
Date: 1987
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