Early Literature on Administered Pricing

Two standard works on Post Keynesian price theory are Downward (1999) and Lee (1998).

But administered pricing has been recognised and studied by economists since the 1930s, and the literature is vast. Below is a sample of the important early literature on fixprices and administered pricing:

(1) Gardiner C. Means

Berle, Adolf A. and Gardner C. Means. 1932. The Modern Corporation and Private Property. Macmillan, New York.

Means, G. C. 1992 [1933]. “The Corporate Revolution,” in Frederic S. Lee and Warren J. Samuels (eds.), The Heterodox Economics of Gardiner C. Means: A Collection. M.E. Sharpe, Armonk, N.Y.

Means, G. C. 1935. Industrial Prices and their Relative Inflexibility. US Senate Document no. 13, 74th Congress, 1st Session, Government Printing Office, Washington DC.

Means, G. C. 1936. “Notes on Inflexible Prices,” American Economic Review 26 (Supplement): 23–35.

Means, G. C. 1939–1940. “Big Business, Administered Prices, and the Problem of Full Employment,” Journal of Marketing 4: 370–381.

Means, G. C. 1962. Pricing Power and the Public Interest. Harper and Brothers. New York.

Means, G. C. 1972. “The Administered Price Thesis Reconfirmed,” American Economic Review 62: 292–306.

Gardiner C. Means studied price setting by modern corporations in the United States, and was one of earliest and most important economists who examined administered pricing. He concluded, after extensive empirical research, that prices of goods produced in many corporations are set by a mark-up on cost of production (Downward 1999: 50).

He was clear that the neoclassical price theory with its ideas of flexible prices adjusted by agents in auction or auction-like transactions is not a description of reality for most markets:

“Basically, the administered-price thesis holds that a large body of industrial prices do not behave in the fashion that classical theory would lead one to expect. It was first developed in 1934–35 to apply to the cyclical behavior of industrial prices. It specifically held that in business recessions administered prices showed a tendency not to fall as much as market prices while the recession fall in demand worked itself out primarily through a fall in sales, production, and employment.” (Means 1972: 292).

“Fourth, the actual behavior of administration-dominated prices … tends to differ so sharply from the behaviour to be expected from classical theory as to challenge the basic conclusions of that theory. However well the theory may apply to market-dominated prices, it would not seem to apply to the bulk of the administration-dominated prices in the sample or to that part of the industrial world which they typify.

Until economic theory can explain and take into account the implications of this nonclassical behavior of administered prices, it provides a poor basis for public policy. The challenge which administered prices make to classical economics is as fundamental as that made by the quantum to classical physics.” (Means 1972: 304).

(2) Hall and Hitch

Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.

Hall and Hitch were part of the Oxford Economists Research Group and postulated a “full cost” theory of pricing, plus mark-up for profit (Downward 1999: 46). Mark-ups are constrained to some extent by competing businesses.

(3) Michał Kalecki

Kalecki, M. 1939. Essays in the Theory of Economic Fluctuations. Allen and Unwin, London.

Kalecki, M. 1939–1940. “The Supply Curve of an Industry under Imperfect Competitions,” Review of Economic Studies 7: 91–112.

Kalecki, M. 1954. Theory of Economic Dynamics. Allen and Unwin, London.

Kalecki, M. 1971. Selected Essays on the Dynamics of the Capitalist Economy. Cambridge University Press, Cambridge.

Michał Kalecki (1939) treats fixprices as set by means of production costs and profit. He also noted the important role of excess capacity in industries. Hall and Hitch’s work influenced Kalecki’s views on prices (Downward 1999: 51).

In Kalecki (1954 and 1971), he developed his theory of prices. He divided prices in market economies into two types, as follows:

(1) cost determined prices; and

(2) demand determined prices.

Most finished goods are cost determined, while many raw materials and primary commodities are demand determined (that is, flexprice markets).

Most manufactured goods have prices that are cost determined. Prices are set under conditions of uncertainty and, crucially, profits are not, strictly speaking, maximised in the neoclassical sense (Downward 1999: 52).

Normal price floors are set by costs of production, and ceilings – at least to some extent – by the average price level in the particular industry concerned.

(4) P. W. S. Andrews

Andrews, P. W. S. 1949 “A Reconsideration of the Theory of the Individual Business,” Oxford Economic Papers n.s. 1.1: 54–89.

Andrews, P. W. S. 1949a. Manufacturing Business. Macmillan, London.

Andrews, P.W.S. 1964. On Competition in Economic Theory. Macmillan, London.

Andrews noted the existence of excess capacity in many firms and how administered pricing is often normal even in markets where competition exists, or that is, “irrespective of the degree of competition which the firm has to meet” (Andrews 1949: 58–59). When firms wish to increase market share, it will often be by means of superior quality and reputation, rather than price cuts (Downward 1999: 50).

Finally, I note how John Kenneth Galbraith in his own important work on administered prices also drew on this earlier literature, particularly Berle and Means and Kalecki (Dunn 2011: 144, n. 46).


BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Northamption, Ma.

Dunn, Stephen P. 2011. The Economics of John Kenneth Galbraith: Introduction, Persuasion, and Rehabilitation. Cambridge University Press, Cambridge and New York.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.