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

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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.

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  • Tom Ross, 1987. "When Sales Maximization is Profit-Maximizing: A Two-Stage Game," Carleton Industrial Organization Research Unit (CIORU) 87-01, Carleton University, Department of Economics.
    • Handle: RePEc:car:ciorup:87-01
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    Cited by:

    1. Sun, Qunyan & Zhang, Anming & Li, Jie, 2005. "A study of optimal state shares in mixed oligopoly: Implications for SOE reform and foreign competition," China Economic Review, Elsevier, vol. 16(1), pages 1-27.

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