“To be sure, in the real world every firm is free to sell or not to sell at the going market price. For example, it is free to withhold some of its product if it believes this will cause a shortage and a rise in market price. But this ‘power’ to withhold supply can in no way force the buyer to pay that higher price. The buyer is always free not to buy if he thinks the price is too high. The only ‘power’ possessed by any firm is the right to post its selling price—merely to ask for whatever price it wants—that’s all! In no way can it compel any buyer to pay that price.” (Shapiro 1985: 366–367).Firms can “in no way force the buyer to pay that higher price”? Note carefully the words: “in no way.”
The buyer “is always free not to buy if he thinks the price is too high”? But that is a trivial observation and does not prove that firms can never force people to pay a higher price.
Consider newly produced and novel electronic goods like iPads, iPhones and iPods.
The manufacturer and retailers set the price and many buyers may well feel the price is too high. Saying that the buyer “is always free not to buy if he thinks the price is too high” does not refute the reality that, if you want the good, you must pay the price retailers ask, even though you think the price is too high or unreasonably high. Just because the firm does not compel you to buy the good at gunpoint, it does not mean that market power is uneven and that some weaker level of compulsion against buyers is involved.
Prices of many goods are not normally set in a mutual haggling process by which the individual buyer has the power to reduce price by haggling. The market power lies with the seller, not the individual buyer.
And, even if enough buyers refuse to buy the good for the firm to turn a profit, that is an outcome from the aggregate influence of buyers, not the individual buyer. Even then the firm may not reduce the price, but simply stop production.
Furthermore, as long as some level of demand exists to create a profit, an administered price is likely, generally speaking, to be inflexible even with respect to changes in its demand in the aggregate, so that buyers not only at the individual level but also in the aggregate can have little influence on its price.
The individual buyer is very much the weaker party in most modern transactions, and the Austrian view firms can in no way force buyers to pay a higher price is ridiculous.
BIBLIOGRAPHY
Shapiro, Milton M. 1985. Foundations of the Market Price System. University Press of America, Inc. Lanham, MD and London.
Are you sure you are analyzing this correctly?
ReplyDeleteThe term "market price" implies a model of markets with an equilibrium arrived at by multiple buyers and sellers, complete with the assumption that no one party is dominant enough to change the equilibrium. Under those conditions, it doesn't matter if one player attempts to withhold production: it will not change the equilibrium.
The presence of fixprices indicates that an equilibrium model does not apply. In this situation, the manufacturer has the power to control the prices available to the buyer. This is a private power the manufacturer does not have in a market equilibrium.
To the extent that lower priced substitutes are unavailable, the manufacturer is forcing buyers to pay a higher price.
"The term "market price" implies a model of markets with an equilibrium arrived at by multiple buyers and sellers, complete with the assumption that no one party is dominant enough to change the equilibrium. "
DeleteWell, yes, obviously the above is not a realistic model of price setting for many markets -- so that there is unequal market power between buyers and sellers in many transactions.
I might also point out that the enlightenment idea of making political power publicly controlled rather than private is mirrored in the public control of prices in ideal free markets, rather than the private control of prices in less ideal situations such as haggling or where fix pricing occurs.
ReplyDeleteThat is an insightful point! There is probably a good blog post or article in that.
Delete"And, even if enough buyers refuse to buy the good for the firm to turn a profit, that is an outcome from the aggregate influence of buyers, not the individual buyer."
ReplyDeleteThere's something to this, I think.
I've always found it fascinating that Austrians and like-minded fellow travelers react with fundamental revulsion when Post-Keynesians or Marxists try to analyze at the level of classes rather than individuals. Meanwhile, when their screwy price theory demands it, they're quite content to view the role of buyers as a class interaction, and then equivocate to try to pass that off as a freedom and power enjoyed by the individual, rather than the aggregate.