Thursday, January 23, 2014

Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 7

Chapter 7 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) continues his analysis of the causal mechanics of mark-up pricing.

To understand how prices are set, Downward contends that we must abandon unrealistic neoclassical behavioural assumptions such as agents that optimise their behaviour under conditions of perfect knowledge (Downward 1999: 130). Not only case studies, but also marketing, management and accounting literature provide crucial insights into business behaviour and conventions (Downward 1999: 141).

Rather, firms face uncertainty and imperfect knowledge.

Mark-up/full cost prices can be seen as a response to uncertainty (Downward 1999: 138–140). Such firms wish to active create a profit level, and they shun competitive prices because this likely to lead to greater uncertainty. Changes in prices in response to demand, for example, will antagonise customers (Downward 1999: 138).

The inertia of mark-up prices decreases uncertainty and has an informational role by providing a relative stability in prices and allowing a greater degree of prediction possible in economic life (Downward 1999: 140).

Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

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