(b) Critically evaluate the Baumol model and examine its contribution to the genre of management models. Explain the economic significance of both the price elasticity of demand and rival price reactions in achieving the objectives. In your reply refer to and support your answer with case study material
Baumol model and its contribution to the genre of management models In the world of business, management need to make lots of decision on daily basis. Those decisions will eventually affect company’s performance. The framework Tn=3, offers a template that focuses on type, technology and time as the three pillars of game embedded strategy, for management to analyze and comment on the observed signals. Type of management is based on a range of variables that can be observed and computed by management, allowing them an opportunity to better understand rival management behaviour. In the management framework, management signal their type to the market. The impact of both type and signalling on business strategy is the genesis of framework Tn = 3. Type = f.(Signals). Understanding of management type is crucial in reading the signals. Therefore, type is important in understanding management behaviour, since type can be signalled to competitors by the observed behaviour of management. The Tn=3 framework draws upon the management models, the traditional Baumol model and the Marris model, and a cost leadership. Baumol type is related to the fundamental of the Baumol model: there is correlation between price and total revenue, depending on the price elasticity of demand. A Baumol type of management focuses on revenues and sales maximisation. One way to achieve this is to focus on price. When price falls, consumers on average buy more and sales revenue should increase. Management can signal a Baumol type by focusing on price or by focusing on revenue maximisation. Since revenue maximisation can be achieved by using price, it becomes imperative for management to...
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