Sunday, November 17, 2013

Downward and Lee on Blinder’s Asking about Prices

Downward and Lee (2001) provide a critical review of Blinder’s now classic Asking about Prices: A New Approach to Understanding Price Stickiness (New York, 1998).

Downward and Lee show that Blinder’s findings are better explained by Post Keynesian price theory, as opposed to New Keynesian theory.

Except for the most irrelevant types of general equilibrium theory, the existence of sticky prices is a widespread “stylised fact” even in mainstream economics (Downward and Lee 2001: 466).

Downward and Lee note that the merit of Blinder’s Asking about Prices is that it rejects questionable econometric methods for a direct well sampled survey of 200 US businesses and managers in interviews and questionnaires (Downward and Lee 2001: 466–467).

Blinder found that about 72% of firms changed product prices less than four times a year, with 45% reviewing their prices only once a year (Downward and Lee 2001: 468):
“Although there is a small ‘auction-market’ sector in the U.S. economy, there certainly appears to be enough price rigidity in most sectors to matter for macroeconomic purposes. According to the survey results, the typical commodity is repriced roughly once a year: and more than 75 percent of GDP is repriced quarterly or less frequently. The mean lag between shifts in supply or demand and the eventual response of prices is about three months; but there is huge variability across firms.

Prices appear to be most sticky in the service sector (which is, of course, the majority of the economy) and least sticky in wholesale and retail trade.” (Blinder et al. 1998: 105).
About 85% of business sales were from repeat customers (Downward and Lee 2001: 469). Moreover, 89% of firms reported that marginal costs either declined or were constant as output changed (Downward and Lee 2001: 469) and over 50% of firms said that they would not increase their prices when demand increased (Downward and Lee 2001: 476).

More importantly, Blinder et al. found the causes of price stickiness that received the most support – as reported by business-people themselves – were cost-based pricing, coordination failure, nonprice competition, and implicit contracts (Downward and Lee 2001: 469; Blinder et al. 1998: 304). Cost-based pricing received an acceptance rate of over 50% (Downward and Lee 2001: 469).

Downward and Lee point out that Blinder et al.’s findings discredit their own assumption that most firms seek to maximise profits in the neoclassical sense (Downward and Lee 2001: 476).

Despite Blinder’s misgivings about how representative Hall and Hitch’s earlier sample was in their research into pricing behaviour in the UK (Hall and Hitch 1939), Downward and Lee (2001: 478) argue that Blinder et al. have actually confirmed Hall and Hitch’s conclusions that most firms base pricing decisions on mark-up and full cost pricing systems, and that firms are so greatly concerned with customer goodwill that they feel frequent price changes will betray this and alienate their client base – an insight also made long ago by Nicholas Kaldor (1985: 26, 19–21).

Blinder, A. S. et al. (eds.). 1998. Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation, New York.

Downward, Paul and Frederic Lee. 2001. “Post Keynesian Pricing Theory ‘Reconfirmed’? A Critical Review of Asking about Prices,” Journal of Post Keynesian Economics 23.3: 465–483.

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

Kaldor, Nicholas. 1985. Economics Without Equilibrium. M.E. Sharpe, Armonk, N.Y.

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