Profit, Growth and Sales Maximization

Abstract

One of the more discredited concepts in the theory of the firm is that of an ‘optimum size’ of firm. Empirical evidence has provided no substantiation for the thesis of a long-run U-shaped cost curve and, since firms are not restricted to the sale of a single product or even a particular range of products, there is no more reason to expect profitability to decline with size than there is evidence to suggest that it does. This raises the question as to what does limit the size of a firm. The answer that has been given is that there are important costs entailed in expanding the size of a firm and that these expansion costs tend to increase with the firm’s rate of growth. This view was first advanced by Edith Penrose [7], has been most fully developed by Robin Marris [5], and has received its most elegant formulation in a paper by Professor Baumol [2] (pp. 34–45 above).

The author is indebted to William Baumol, Keith Hartley, Alan Peacock and Alan Williams for useful comments on an earlier draft. Responsibility for any errors and opinions expressed is that of the author alone.