Business pressures
Issues for evaluation on merger /
takeover & business behaviour
Monopoly & Oligopoly…
Who controls the business?
Satisficing

Satisfy + Suffice = satisfice…

Managers often face uncertain future

Asymmetric information

Therefore do not maximise but satisfice..
Traditional goal
Profit maximising…
Diagram…
Senior managers &
CeO’s would be
happy with this
What’s the alternatives?
Revenue maximising

Sales maximising

Normal profits
Diagrams
?

Mid managers would
be happy with this
What’s the other revenue
maximising diagram?
Can use
this in Multi
choice…
for MR =
MC Q
Constraints on not profit
maximising?

Shareholder pressure for dividends –
interim & end of year

Shareholder pressure for share value

Stock market valuation
What pricing strategies can you
think of?

Sales Revenue Maximisation

This objective was initially developed by the work of Baumol (1959).
Baumol's research focused on the behaviour of manager-controlled
businesses - where the day-to-day decisions taken by managers are
divorced from the shareholders (the owners of the business).
Baumol argued that annual salaries and other perks might be more
closely correlated with total sales revenue rather than bottom line
profits. An alternative view was put forward by Williamson (1963),
who built a model based on the concept of managerial satisfaction
(utility). This can be enhanced by success in raising sales revenue.

Total revenue is maximised when marginal revenue = zero. The
shareholders of a business may introduce a constraint on the price
and output decisions of managers - this is known as constrained
sales revenue maximisation. They may introduce a minimum profit
constraint designed to underpin the market valuation of their shares
and maintain a dividend (a share of the company's profits).

Limit Pricing

Firms may adopt predatory pricing policies
by lowering prices to a level that would
force any new firms entering the industry
to operate at a loss. This would allow firms
to sustain a monopoly position in a market.
Satisficing issues

Maximising behaviour may be replaced by satisficing - I.e. setting
minimum acceptable levels of achievement.

The domestic and international Equity and Bond markets may play
an important role in monitoring the performance of managers in a
company - when companies are under-performing set against the
performance of other businesses in a market, there may be
downward pressure on the share price, raising the threat of a
contested takeover bid by a rival firm.

A firm may be under pressure to reduce prices to consumers if it has
made large profits and may choose to do this in order to stop an
investigation by the Competition Commission or to improve its image
with customers.

Alternatively, the firm may reward workers with higher wages in
order to stop industrial action.
Tomorrow – an exam paper
review
With examiner feedback & sample
answers…