Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 8

Chapter 8 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) is a fundamental chapter analysing business decision making and price setting in firms through a new survey conducted by Downward himself involving 283 UK manufacturing enterprises (Downward 1999: 150–151).

Downward (1999: 159–163) concludes that his results strongly confirm the main findings of Hall and Hitch: that costs mainly determine prices, and mark-up prices are based on total average costs (including overhead/fixed costs) plus a profit mark-up.

When asked whether the firm set its prices for its products by means of a mark-up on average costs, 63.7% of firms said either “very often” (29.9%) or “often” (33.8%). A further 17.3% said “sometimes.” Only 7% said “rarely,” and only 8.1% said “not at all.” (Downward 1999: 160).

Overhead costs are important in calculating cost. When asked whether the firm set separate mark-ups to recover both overhead costs and profit in its product prices, 62.3% of firms said either “very often” (25%) or “often” (37.3%).

Price stability is something firms specifically desire (Downward 1999: 164): when asked whether businesses set prices to create price stability on the market, 65.5% of firms said “very often” (17.3%) or “often” (48.2%) (Downward 1999: 160).

Downward holds that the general unwillingness of mark-up pricing firms to change prices in response to demand changes is an entirely rational form of business behaviour (Downward 1999: 149), since under conditions of uncertainty there is a need for stable expectations (Downward 1999: 177), and this can be achieved through mark-up pricing.

BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.