But a fundamental empirical observation about many markets for newly produced goods and services, especially in industrial markets, is that prices are administered or set by corporations and businesses, according to normal production costs plus a profit markup.
Some observations on this follow:
(1) often business leave their prices unchanged for significant periods of time, from three months to a year, despite changes in demand (Gu and Lee 2012: 462). When prices are adjusted this is the result of changes in factor input costs, including raw materials and labour. Changes in the profit markup result from competition and need for profit.
(2) The profit markup is itself often stable as well, which leads to some degree of stability of profits that results from price administration (Gu and Lee 2012: 461). Stable profits in turn allow stable margins for internal financing of investment (Melmiès 2012).
(3) the advantages of price setting to businesses include the reduction of the occurrence of price wars, goodwill relationships with customers, and stable selling costs (Gu and Lee 2012: 461).
(4) empirical studies show that, outside given limits, businesses find that variations in their set prices produce no significant change in sales volume, and, above all, when prices are cut, this does not necessarily lead to changes in short term market sales (Gu and Lee 2012: 462). And experiments with prices adjusted downwards to a significant extent show that this causes a severe blow to profits, so severe indeed that enterprises quickly abandon all such experiments (Gu and Lee 2012: 461).
Gu, G. C. and F. S. Lee. 2012. “Prices and Pricing,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 456–463.
Melmiès, J. 2012. “Price Rigidity,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 452–456.