Friday, August 16, 2013

Lee’s Post Keynesian Price Theory: Chapter 3

The third chapter of Frederic S. Lee’s Post Keynesian Price Theory (Cambridge, 1998) deals with the further history of the doctrine of administered prices.

Gardiner C. Means had a great influence, but his work was developed over a period of 40 years by Rufus Tucker, Edwin Nourse, Abraham Kaplan, and Alfred Chandler (Lee 1998: 69).

When the Great Depression struck the US, there was increasing criticism of oligopolistic corporations and a feeling that the reduction in competition brought about by big business and the rigidity in corporate prices were the major cause of the depression (Lee 1998: 69). Some saw the solution as breaking up big business and regulating corporations.

Paradoxically, big business responded to this unpopularity by funding studies in research foundations and institutions to defend themselves, but these studies produced important empirical work on the role of administered prices (Lee 1998: 70).

Rufus Tucker’s research indicated that administered prices were far more important historically than others thought, were not just confined to big business, and had existed to some degree since the 1830s (Lee 1998: 71).

While farming was an important sector where flexprices did exist, industrial markets had long had a degree of relative price inflexibility. Moreover, Tucker also argued that the price elasticity of demand was quite small for many industrial products (Lee 1998: 72, n. 4), while employment and production in this sector were very sensitive to demand changes (Lee 1998: 72).

Industrial price reductions in recessions were more the result of the falls in factor input costs rather than price changes in response to demand (Lee 1998: 72).

Another study was conducted by Edwin Nourse and funded through the Falk Foundation. Nourse confirmed that administered pricing was a fundamental activity of corporate management, and was based on cost accounting and calculation of average total costs at a given capacity utilisation rate plus the profit markup (Lee 1998: 76). The constraints on this price setting behaviour included the often poor responsiveness of demand to price changes and the reactions of competitors (Lee 1998: 77). The emergence of business and trade associations and basing-point pricing systems allowed businesses to avoid unwanted price wars and fix the market prices of goods in a particular market around a certain level (Lee 1998: 77).

Still further empirical work after 1945 was done by Abraham Kaplan and Alfred Chandler in interviews of management from 28 major corporations (Lee 1998: 78). Their findings were that normal cost and target rate of return pricing was used by virtually all firms surveyed (Lee 1998: 78).

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

1 comment:

  1. Thanks for introducing a whole new concept to me. The book looks great and I'm sure if Post Keynesians could formulate an alternative theory of prices it would be an enormous step forward. I'll see if I can get my hands on a copy and decide for myself.