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Unit-19: Behavioural and Managerial Theories of the Firm

which the assets and selling profits etc. are grown. If he selects the high growth rate then he needs to pay Notes
on advertisement and R&D for making new product and demand. So he will take more average profit
percentage to himself for spreading the firm. As a result, the profit distributed to shareholders will be
less and thus, the price of share will decrease. The treat to take over the firm with managers will see.
Since managers are keen interested to safe their jobs as well as firm’s growth, so they select a growth
rate, which gives the maximum rate to shares, gives satisfied profit to shareholders, and prevents that
firm to take over by another. On the other hand, owner (means shareholders) wants the stable growth
of firm because by this he gets good return of the capital. So the purpose of managers and shareholders
are similar and both want to get a perfect stable growth for firm.

Self Assessment

Fill in the blanks:
1. Oligopoly is not ......................... to others.

2. All main items like profit, selling and ......................... grow in a similar rate.
3. Firms grow by ........................ .

Its Assumptions

Marris model is based on following assumptions:
1. It applies a fixed price base.

2. The production cost is given.
3. Oligopoly is not related to each other.
4. The service price has given.
5. Firms are grown by diversification.
6. All main items like profit, selling and cost grow in a similar rate.

The Model

On the above assumptions, the purpose of firm is to maximize its growth rate (G). G itself depends upon
two factors – first, the growth rate of product for firm; and second, the growth rate (GS) of capital fund.
Thus, G = GD = GS.
However, the ownership is different from administration in all modern big firms, but the main purpose
of managers and owners is the stable growth of firm. According to Marris, there are two utility functions
for the owner of firm and managers. The utility function of managers includes his income, power,
security of job etc. while the utility function of owner includes profit, capital, parts of market etc.
Thus, the purpose of manager of a big firm is to maximize his utility and his utility depends upon the
growth rate of firm. However, the main purpose of him is to maintain the growth of firm, but he also
needs to secure his job. The security of job of manager depends upon the satisfaction of shareholders,
whose main purpose is to maximize the share price as well as the profits. Marris analyzes those factors by
which firm try to fulfill its profit maximization growth. The firm produces new product, creates demand
for new product and expands its shape. Marris told this Differentiated Diversification. To create a new
product depends upon rate of diversification, advertisement expenditure, R&D expenditure etc.

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