It is important to understand the idea of ‘ownership and control,’ where the owners of a private sector company normally elect a board of directors to control the business’s resources for them. It is the shareholders who take the risks within the company and as a result, receive profits as a factor reward. Directors, whom represent shareholders, control the different aspects of the business, and managers control the day to day decisions, both receiving wages as a reward. Within large companies, managers may take over the role of directors and become divorced from the owners. However, managers do not necessarily maximise profits all the time, but managers who do not provide ‘shareholder value’ will not survive in the long run and nor will businesses the do not understand the significance of profit maximising. One reason why firms might depart from profit maximisation is that it is difficult for them to identify their profit maximising output, as they cannot accurately calculate marginal revenue and marginal costs. Often the day-to-day pricing decisions of businesses are taken on the basis of “estimated demand conditions” rather than a systematic calculation of a demand curve. Most modern businesses are multi-product firms operating in a range of separate markets. The amount of information that they have to handle can be vast. And they must keep track of the changing preferences of consumers and ever-evolving market conditions. The idea that there is a neat and single profit maximising price is really redundant.
William Baumol, came up with the idea of maximising sales revenue rather than profits. His research focused on the behaviour of manager-controlled businesses, where price and output decisions taken by managers are divorced from the shareholders. Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue