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Sales Optimisation Model Under Oligopoly Firm

  Sales Optimisation Model under Oligopoly Firm

Sales Optimisation Model: Price – Productivity Ascertainment of a commodity without Publicity

         We are going to discuss Baumol’s sales optimisation of an oligopoly industry in crate when an industry manufactures a single commodity and does not undertake any outlay on advertising or other promotional efforts.

         Let us presume that industry’s time horizon is a solo phase and in this phase the industry looks for to optimise its sales proceeds subject to a smallest amount of profit restraint.

         The industry does not regard the effect of its price productivity choice in the present phase on price and productivity in the consequent phase. Apart from it, it is presumed that minimum profit restraint is exogenously ascertained by demands and expectations of shareholders and financial corporations of the industry.

         The industry must accomplish this minimum level of profits so as to fulfil the investors and to stop a drop in prices of industry’s shares in stock exchange. It is described diagrammatically, price productivity ascertainment in Prof. Baumol’s sales or aggregate revenue optimisation model.

         Let us presume where the Y axis weighs aggregate revenue, aggregate cost and aggregate profits in terms of dollars and the x axis weighs the aggregate productivity.

         TR and TC are correspondingly aggregate revenue and aggregate cost curves. As aggregate cost curve TC begins from the origin, it entails the figure denotes to the long run cost revenue condition.

         TP is the aggregate profits curve which first mounts and then after a point drops downwards. As aggregate profits are the dissimilarity among the aggregate revenue and aggregate costs at diverse levels of productivity, thus aggregate profits curve TO weighs the vertical dissimilarity among the TR and TC curves at diverse levels of productivity.

         If the industry aims at optimising profits it will manufacture OR productivity. This is for the reason that relating to productivity OR, the highest point of the profit curve TO falls.

         However, as we have discussed above, as per Prof. Baumol, the industry does not seek optimisation of profits. On the other hand, if the industry needs to optimise sales, it will predetermine productivity at OT, level which is bigger then OR.

         At productivity OT aggregate sales revenue is TA2 which is optimum in the figure. At this aggregate sale revenue optimising productivity level OT, the industry is making aggregate profits paritying to TU which are less than the optimum, achievable profits RV.

         It will be unambiguous from the diagram that aggregate sales revenue optimisation OC is greater than profit optimisation productivity OR. Prof. Baumol fulfils that the business industries aim at aggregate sales revenue optimisation subject to a minimum profit restraint.

         Now, if OP is the minimum aggregate profits which an industry needs to procure then PX is the minimum profit line. Now, this minimum profit line PX intersects the aggregate profits curve TP at point E.

         Thus, if the industry needs aggregate sales revenue optimisation subject to the minimum profits of OP, as has been fulfilled by Prof. Baumol, then it will manufacture and sell productivity OS.

         At productivity OS, the industry will be having aggregate revenue paritying to SA1 which is less than the optimum feasible aggregate revenue of TA2. However, the aggregate revenue SA1 is the optimum accessible revenue to earn the minimum desirable profits OP.

         It has to be noted that the industry can earn minimum profits OP even by manufacturing OQ productivity – minimum profit line PX also intersects the aggregate profits curve TO at point W.

         However the aggregate revenue at productivity at OQ is much lower than that at productivity IS. Thus, provided the industry’s aim of optimising aggregate revenue subject to the minimum profit restraint, the industry will not manufacture OQ productivity or at point V.

         It is to be noted from the diagram that the productivity OS falls in amid OR and OT, which is it is greater than profit optimising productivity OR nevertheless smaller than the aggregate revenue optimising productivity OT.

         Therefore, in Prof. Baumol’s model, oligopolistic industry will be earning profits SE or OP.


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