Critically Evaluate the Management Model of Baumol

Under the traditionalistic economic understanding, it is constantly assumed that remuneration maximization is treated as the main goal or objective for businesses, subject to perfect cognition, whizz entity and reasoning(prenominal) logic. However, as illustrated by the principal-agency problem, managers do non normally dissemble rational ending entirely same owners who flash comp any(prenominal) interest as their fillet of sole basis for their stopping points. Past examples have shown that managers do take their own personal goals and satisfactions as consideration in their decision-making.In addition, information gathering is not almodal values perfect as managers do pretend decision by relying solely on the implicit knowledge advantageed from past experiences, with divulge referencing to the macro-economic environment and the current trade changes. cartel all these factors, it is therefrom understand commensurate that businesses do not always work toward net inc ome maximization, at to the minusculeest degree in the short edge, and other objectives like financial objective, trade deal out, executive power, etc. do make in business decision making.However, as pointed out by mixed academics (Baumol, 1962 Marris, 1964 Williamson, 1963), profit maximization does not always make out as the only reform objective for a firm, peculiarly at various vocalises of the business on a timeline scale. A point-in-hand is Baumol determine. As an alternative to profit maximization sticker, Baumol mock up deeds on the correlation between scathe and create signal decision with the objective of maximizing gross gross sales revenue enhancement, subjected to minimal profit modesty by sh arholders.In profit maximization clay sculpture, profit is maximised at the output where b ar(a) Revenue (MR) is equaled to Marginal Cost (MC) whereas Baumol Model emphasizes on maximizing sales revenue (TR) and may deteriorate the MC = MR point to achie ve its goal. This mock up argues that businesses try on to maximise sales revenues rather than profits with the mathematical motives much(prenominal) as growing or sustaining commercialise sh be, to fill up unornamented cap subjectness, discourage sweet entrants, management performance and etc.In addition, Baumol model provides a platform to understand some of the determine strategies adopted by certain industries, which usually sh be common characteristics of having huge sunk equal and number 1 vari open court. In much(prenominal) industries where quick-frozen approach or sunk terms takes up a huge part of the total cost, producing a single unit and its supreme al brokenable output (without expanding its mental object in the short term) does not have any signifi seatt impact to the total cost.In such instances, profit maximization model is neither interoperable nor feasible as a focus of the model relies on seeking the output point where MC=MR. In the case of W alt Disney, the operational cost does not differ much whether there is unmatched corroborate or maximum allowable patronages as a theme park has to be fully available during its operation mins, which render the MC at vigour or near zero level. The objective of the instal to seek sales revenue maximization for the sidereal day rather than foc apply its effort to achieve the output point where MC=MR to maximize its profit does make brain.This explains the two-part pricing strategy adopted by Walt Disney where a fix initialization fee per entry is super delegationd and allows the patronage to have as many spare rides as they wish. Another example is the telecom industry, where the initial investment/fixed cost (for example open up the satellite and setting up the infrastructure) is huge, and the variable cost per call is insignificant to the total cost. In such industry, firms leave behind focus on maximizing sales revenue (with constraints to maximum capability/output) by development strategies like expenditure disparity strategy.In this strategy, the firms charge a different unit damage to cap and off-peak hours, as there is plenty of spare capacity at off-peak hours. Since MC of output is low, any spare revenue that can be generated from this surplus capacity will be profit to the firms. As such instance, it is rational for telecommunication industrial to adopt sales maximization model like Baumol. In addition, as short term capacity is always constraint and limited, telecommunication industries would not want to experience personnel casualty sales due to their inability to meet guest crave, especially during peak hour usage.As armed service providers, consistent and frequent service failure could see to be fatal in term of their selection and their long-term brand reputation. Therefore it would make sense for telecommunication firms to divert the peak-hours traffic into non-peak hours by using a damage discrimination strategy whic h segments the users ground upon their willingness and abilities to carry. For instance, business-users are willing to pay utmoster price for peak-hours usage due to their ine uttermost(a)ic demand whereas in contrast, leisure-users demand is elastic and are willing to make call during off-peak hours in return for lower price.By adopting the price discrimination strategy, telecommunication firms are able to maximize sales revenue during peak and off-peak hours by balancing the air-time traffic based upon different market segment of users. At this point, it is in like manner noticeable that one of the characteristics of Baumol firms lies in the perishable products/ work catered which cannot be inventoried. The personnel casualty sale of the day on the unutilized capacity/outputs is an opportunity cost to the firms.Baumol model is not only applicable to huge/large corporations, but also to pocket-size retailers like bakery shop or affluent market, which explains the reason w herefore some bakery shops put out a special discount one hour before the shop closed to maximize the revenue. The precepts utilize similarly to the low cost carriers (LCC) where price discrimination is used as a strategy to maximize revenue. LCCs sell a cheaper price to early schedule passengers and a high price for last sensitive passengers to join on the revenue.LCCs used the existence of multiple segments to serve and the opportunity to utilize surplus capacities to generate additional revenue. The adoption of sales revenue maximization model is also used as an potent way of securing additional market part within a regulated market with limited players where market sureness is vital. In related to pricing, add-on product/services like travel insurance, priority boarding and choosing-a-seat are used as bundled religious offering to the customer to gain extra profit.Firms are willing to earn a smaller profit if it means that they are able to gain a competitive advantag e from their contact firms. As an illustration, Fitness club is a thoroughly example to elaborate how Baumol model is applied through adopting different pricing strategies. The reasons behind Fitness friendship in adopting Baumol model include penetration to impertinently market segments, retaining existing customer and to fill up spare capacity. True Fitness, which is a chained fittingness centre, is effectively using Baumol model by offering different pricing strategies to capture different market egments, for instance, offering periodic fees to unsure-customer and periodical/lifetime social status to certain-customer. Two types of pricing strategies are used by True Fitness to maximum its sales revenue, which are- i)Two part pricing ( lifetime membership) The smart set offers a lifetime membership at ? 1. 5K as one-off compensation and charges a minimal price of ? 20 p.a. as administration/subscription fee. By paying a lifetime membership fees as fixed price, the cu stomers are able to enjoy the facilities for life for as low as ? . 67 per month, which no other rivals is able to compete with this low price. As per other industries discussed above, physical fitness clubs have the similar characteristic like high initial set up cost and low marginal cost to adopt the Baumol model. The company charges an direct fee to gain maximum consumer surplus and utilizes the yearly subscription fees, which is equaled to the marginal cost/average variable cost, to covering fire its yearly running costs.In addition, in order to adopt the two-part pricing strategy to maximize sales revenue, the company postulate to have a tokenish output (also known as critical mass), so that the full consumer surplus can be derived from the fixed fees. For example, if the yearly running cost (without considering the depreciation cost of the initial set up) is ? 200,000, in order to offer a yearly subscription fee of ? 20, the company needs to have a minimum membership of 10,000 in order to reduce the average variable cost/marginal cost to this level.By adopting Baumol model, which gives a higher output with lower price, this is achievable. This pricing strategy is also applicable to other chained-companies where the firms can derive the maximum profit from the fixed fee and use it as capital/investment to set up a new chain store. At the same time, soulfulness chain store is able to run by itself from the revenue derived from the minimal pricing. ii)Price discrimination ( monthly membership vs. lifetime membership) True Fitness segments their customers into certain and uncertain customer by ffering different pricing to monthly and lifetime membership. The club is willing to offer a lower price to customers who are willing to commit, in comparison to uncertain customers. As illustrated in preceding examples, fitness clubs need to fill up spare capacities as any unutilized capacity carried an opportunity cost. With customers commitment, they are ab le to secure their stability in term of both volume and sales revenue. For those uncertain customers, the company charges a higher price, which customer willing to pay due to the flexibility and short-term commitment.From the above illustrations, it is bare that a key characteristic of the Baumol model hinges on the grab of demand. As shown, Baumol model uses pricing strategies as a mean to achieve revenue maximization, and is therefore heavily dependent on the price elasticity to achieve the objective of the model If the demand is inelastic, Baumol model will not work as the demand of the product/services will not plus proportionately and therefore the sales revenue will not maximize from the reduction in price.In addition, denote effect has not been considered in the above examples, which is a common tactic used to increase the inelasticity of demand. The psychological effect of advertising has been proven effective in occupying the mindset of consumers through brand catch bu ilding, which increase the affiliation of the consumers to certain products/services, thus the inelasticity of the demand. The pointers from the last paragraph are well-illustrated by the Memo 1 example in Baye text book.In this example, it is shown that the price change does not correlate with the demand. By minify the price from the current, $10. 50 to $10, the subscribers usher outs from 881 subscribers to 842, causing the revenue to drop from $9251 to $8240 and therefore a profit drop of $614. 5. (Appendix 1). In reverse, the firm should increase the price to $11. 5 to maximize the revenue at $11282 and a price of $12. 5 to maximize the profit at $4734. One of the reasons is due to the advertising and promotional effort from the company which increases the inelasticity of the demand.Secondly, since a loyal group of subscribers has already been amassed, STARZ profits functions more than as an add-on product to the existing subscribers. The gang of these two factors explained the reason wherefore sales revenues and profit actually increases with price increases. In addition, from the data on STARZ network (Appendix 1), it is apparent that STARZ network does not share the same characteristics of high fixed cost or excess capacity to apply Baumol model. Instead, it seems like advertising or bundled pricing works better for STARZ network rather then price reduction.Further to the points above, Baumol model players are highly susceptible to the price reaction from their rivals, which could easily result in a price-war especially in an oligopolistic market. The existence of a floor triggering price in Baumol model constrained the players from lowering the price too much which will defeat the mathematical function of revenue maximization. Thus, it is highly unfavorable for Baumol model players to beat a price-cutting reaction from their rivals when they attempt to lower the price.This explained why certain Baumol model players used noise as disguise to th eir rivals when lowering the price to achieve revenue maximization. To summarize, long-term profit pursuance remains as the ultimate objective for any business. However, due to unlike characteristics of different industries, there are various models that can be used to achieve this long-term objective, which explains why certain firms are willing to sacrifice profit today in exchange for profit tomorrow.As illustrated through various examples in this assignment, the application of the manufacture model for the right industries and at the correct phrase of the company life-cycle becomes an even more important decision for managers to make. With the understanding and knowledge gained through the detailed abbreviation and critique of Baumol model, an useful insight to the economic rationale adopted by various industries, like Walt Disney, LCC and telecommunication firms is achieved. Bibliography Mercuro, N. , Haralambos, S. Gerald, W. , 1992. Ownership Structure, Value of the Firm a nd the Bargaining office staff of the Manager. Southern Economic diary, 59(2), pp. 273-83. Baumol, W. J. , 1996. 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