Traditional theory assumes profit maximisation as the sole objective of a business firm. In practice firms have been found to be pursuing objective other than profit maximisation.
Large firms pursue such goals as sales maximisation, revenue maximisation, a target profit, retaining market share, building up the net worth of the firm, etc.
However, traditional theory assumes full and perfect knowledge about current market conditions and the future developments in the business environment of the firm. The firm is thus supposed to be fully aware of its demand and cost functions in both short and long runs.
Briefly speaking, a complete certainty about the market conditions is assumed. On the contrary, it is widely recognized that the firm does not possess the perfect knowledge of their costs, revenue, and their environment. They operate in the world of uncertainty. Most price and output decisions are based on probabilities.
The marginal principle of equalizing MC and MR has been found to be absent in the decision-making process of the firms. Empirical studies of the pricing behaviour of the firms have shown that the marginal rule of pricing does not stand the test of empirical verification. Hall and Hitch have found, in their study of pricing practices of 38 firms, that the firms do not pursue the objective of profit maximisation and that they do not use the marginal principle of equalizing MR and MC in their price and output decisions.
Most firms aim at long-run profit maximisation. In the short-run, they set the price of their product on the basis of average cost principle, so as to cover AC = AVC + AFC and a normal margin of profit (usually 10 per cent). In a similar study, Gordon has found that there was marked deviation in the real business conditions from the assumptions of the traditional theory and that pricing practices were notably different from the marginal theory of pricing.
He has concluded that the real business world is much more complex than the one postulated by the theorists. Because of the extreme complexity of the real business world and the ever-changing conditions, the past experience of the business firms is of little use in forecasting demand, price and costs. The firms are not aware of their MR and MC. The average-cost-principle of pricing is widely used by the firms. Findings of many other studies of the pricing practices lend support to the view that there is little link between pricing theory and pricing practices.