ROTHSCHILD HYPOTHESIS OF LONG RUN SURVIVAL AND MARKET SHARE GOALS.Prof. K.W. Rothschild has suggested security profit as the objective of a business Firm in oligopoly market in his book, “ Price Theory and Oligopoly” published in 1947. According to him, “ there is another motive which is probably of a similar order of magnitude as the desire for maximum profits, the desire for security profits.” under oligopoly a firm is to struggle to achieve and maintain a secure position in the long run. According to Rothschild, “ Profit maximisation may be the objective of a firm in perfect competition or monopolistic competition due to the large number of firms or in a monopoly because firm is not faced with security problem. But in oligopoly, a firm needs protection against the aggressive policies of the rivals . The desire to increase its security leads to the struggle leads to the struggle for position and to its setting of a reasonable price which neither provokes rival firms to retaliate nor encourages new entrants and bring about a reasonable profits above its cost of production. Security profits are more or less profit maximization.

Williamson’s Model

Oliver E. Williamson has developed managerial utility maximization objective of a business. According to this theory, there are two separate groups i.e. shareholders and managers in large modern firms. The shareholders want maximum return on their investment and hence they are interested in profit maximization. On the other hand managers are interested in their utility function after achieving a minimum accepted level of profits. They are not only interested in increasing their own emoluments but also in the size of their staff and their salaries. This theory is related to maximization of the manager’s utility

which is a function of the expenditure on staff and emoluments and discretionary funds.

U=f(S,M,D)

where U is manager’s utility, s is the staff expenditure, M is the management slack and

D is the discretionary investments.

According to Prof. Williamson, “ The managers get satisfaction from using some of the firm’s potential profits for unnecessary spending on items which they personally spending on items which they personally benefit.”

They may spend the firm’s resources in the following three ways:

The manager desire to expand their staff and to enhance his salaries. More staff means high salary, more prestige and security to the manager. This staff expenditure is denoted by S.The manager expenditure on appointing pretty secretaries, purchasing company’s cars and getting too many company phones and perks for employees known as management slack by Oliver. E. Williamson.Discretionary funds are maintained to promote company projects by the managers after making payments of taxes and dividends. y

Discretionary Profits R Q

F U1 U

o Staff Salary x

STAFF EXPENDITURE IS MEASURED ON X-AXIS WHERE AS DISCRETIONARY PROFITS ARE MEASURED ON Y-AXIS. FC IS THE FEASIBILITY CURVE SHOWING THE COMBINATIONS D AND S AVAILABLE TO THE MANAGER. IT IS ALSO KNOWN AS THE PROFIT STAFF CURVE. UU AND U1U1 ARE THE INDIFFERENCE CURVE OF THE MANAGER WHICH SHOWS VARIOUS COMBINATIONS OF D&S. RS IS THE MAXIMUM PROFIT LEVEL AT OS STAFF EXPENDITURE INCURRED. BUT MANAGER’S UTILITY IS MAXIMISED AT Q WHERE HIS HIGHEST POSSIBLE UTILITY FUNCTION U1U1 AND THE FEASIBILITY CURVE FC TOUCH EACH OTHER. AT Q THE DISCRETIONARY PROFITS OD=QS1 ARE LESS THAN THE MAXIMUM PROFITS RS BUT STAFF EXPENDITURE (EMOLUMENTS) OS1 ARE MAXIMISED.

According to Prof. Williamsons, “ Feasibility curve can shift due to changes in taxes and business conditions. As a result optimum

tangency point Q will also change similarly if staff expenditure and profit of stockists change the shape of the utility function will change that will shift the optimum position of tangency point Q.

CRITICISM

IT DOES NOT CLARIFY THE BASIS OF THE DERIVATION OF THE FEASIBILITY CURVE.

UTILITY FUNCTION IS AMBIGUOUS AS IT

MIXES THE NON-PECUNIARY AND PECUNIARY BENEFITS OF THE MANAGER.

IT DOES NOT DEAL WITH OLIGIPOLISTIC

INTERDEPENDENCE AND RIVALRY.

I t fails to indicate the constraint in the profit-staff relation as shown by the shape of the feasibility curve.

Critics pointed out that measure of compensation does not give sufficient weight to non-monetary benefits other than salary. As a result it may seriously under-estimate. The profit maximising behaviour of the firm’s managers.