(1) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 1,” January 16, 2014.
(2) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 2,” January 17, 2014.
(3) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 3,” January 18, 2014.
(4) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 4,” January 21, 2014.
(5) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 5,” January 21, 2014.
(6) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 6,” January 22, 2014.
(7) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 7,” January 23, 2014.
(8) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 8,” January 23, 2014.
(9) “Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 9,” January 23, 2014.
Showing posts with label Pricing Theory in Post-Keynesian Economics. Show all posts
Showing posts with label Pricing Theory in Post-Keynesian Economics. Show all posts
Thursday, January 23, 2014
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter by Chapter Summaries
Below are links to my various posts giving chapter by chapter summaries of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999).
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 9
Chapter 9 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) presents his conclusions.
Downward concludes that critical realism is the appropriate method for Post Keynesian economics (Downward 1999: 181).
For Downward, the
Econometric studies are only a limited and incomplete form of evidence on pricing and the fundamental empirical work must remain qualitative case studies (Downward 1999: 183).
Demand obviously influences flexprices, and it can influence mark-up prices too, but does so to a lesser degree than costs. Downwards’ own research finds that “prices display considerable inertia” (Downward 1999: 184).
Businesses’ general unwillingness to change prices is rational, and is part of their behavioural attempts to overcome uncertainty and stabilise expectations (Downward 1999: 187).
These conclusions are highly problematic for neoclassical economics.
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Downward concludes that critical realism is the appropriate method for Post Keynesian economics (Downward 1999: 181).
For Downward, the
“behavioural ‘core’ of post Keynesian pricing theory can be identified through the focus on the mark-up. In deference to research on actual agent decision making under conditions of uncertainty, post Keynesians should emphasise that prices are set by firms adding a mark-up to some measure of average costs. The mark-up is determined ex ante in the uncertain pursuit of some (possibly multiple) objective(s).” (Downward 1999: 181).This is in contrast to neoclassical economics that neglects overhead/fixed costs, and frequently has unrealistic assumptions in its behaviour theory.
Econometric studies are only a limited and incomplete form of evidence on pricing and the fundamental empirical work must remain qualitative case studies (Downward 1999: 183).
Demand obviously influences flexprices, and it can influence mark-up prices too, but does so to a lesser degree than costs. Downwards’ own research finds that “prices display considerable inertia” (Downward 1999: 184).
Businesses’ general unwillingness to change prices is rational, and is part of their behavioural attempts to overcome uncertainty and stabilise expectations (Downward 1999: 187).
These conclusions are highly problematic for neoclassical economics.
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 8
Chapter 8 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) is a fundamental chapter analysing business decision making and price setting in firms through a new survey conducted by Downward himself involving 283 UK manufacturing enterprises (Downward 1999: 150–151).
Downward (1999: 159–163) concludes that his results strongly confirm the main findings of Hall and Hitch: that costs mainly determine prices, and mark-up prices are based on total average costs (including overhead/fixed costs) plus a profit mark-up.
When asked whether the firm set its prices for its products by means of a mark-up on average costs, 63.7% of firms said either “very often” (29.9%) or “often” (33.8%). A further 17.3% said “sometimes.” Only 7% said “rarely,” and only 8.1% said “not at all.” (Downward 1999: 160).
Overhead costs are important in calculating cost. When asked whether the firm set separate mark-ups to recover both overhead costs and profit in its product prices, 62.3% of firms said either “very often” (25%) or “often” (37.3%).
Price stability is something firms specifically desire (Downward 1999: 164): when asked whether businesses set prices to create price stability on the market, 65.5% of firms said “very often” (17.3%) or “often” (48.2%) (Downward 1999: 160).
Downward holds that the general unwillingness of mark-up pricing firms to change prices in response to demand changes is an entirely rational form of business behaviour (Downward 1999: 149), since under conditions of uncertainty there is a need for stable expectations (Downward 1999: 177), and this can be achieved through mark-up pricing.
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Downward (1999: 159–163) concludes that his results strongly confirm the main findings of Hall and Hitch: that costs mainly determine prices, and mark-up prices are based on total average costs (including overhead/fixed costs) plus a profit mark-up.
When asked whether the firm set its prices for its products by means of a mark-up on average costs, 63.7% of firms said either “very often” (29.9%) or “often” (33.8%). A further 17.3% said “sometimes.” Only 7% said “rarely,” and only 8.1% said “not at all.” (Downward 1999: 160).
Overhead costs are important in calculating cost. When asked whether the firm set separate mark-ups to recover both overhead costs and profit in its product prices, 62.3% of firms said either “very often” (25%) or “often” (37.3%).
Price stability is something firms specifically desire (Downward 1999: 164): when asked whether businesses set prices to create price stability on the market, 65.5% of firms said “very often” (17.3%) or “often” (48.2%) (Downward 1999: 160).
Downward holds that the general unwillingness of mark-up pricing firms to change prices in response to demand changes is an entirely rational form of business behaviour (Downward 1999: 149), since under conditions of uncertainty there is a need for stable expectations (Downward 1999: 177), and this can be achieved through mark-up pricing.
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
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).
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
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).
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Wednesday, January 22, 2014
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 6
Chapter 6 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) reviews the work of Hall and Hitch, and the “full cost”/ “marginal controversy” debate of the 1940s and 1950s.
Downward is clear that non-econometric empirical evidence is needed to properly understand the causal processes involved in explaining mark-up pricing by businesses (Downward 1999: 114).
Hall and Hitch (1939) were some of the first economists to do this type of survey. They concluded that the firms they surveyed did not attempt to base price on marginal cost, but set price on the basis of full average costs (determined by means of an estimated or projected level of output) with a profit mark-up, although the price and mark-up were influenced by competing firms (Downward 1999: 115).
The work of Hall and Hitch (1939) and other surveys on full cost pricing provoked a controversy in mainstream economics in the 1940s and 1950s called the “full cost”/ “marginal controversy.”
One of the most useful parts of this chapter is Downward’s review of this literature (Downward 1999: 117–120).
As Downward notes, the value of direct surveys of firms on how they set prices – the qualitative studies – lies not just in evidence on how prices are actually set, but in showing the causal processes that determine this behaviour (Downward 1999: 124).
The main surveys and articles in the “full cost” debate can be seen below in the order of (1) those that attacked and argued against the marginalist theory of pricing, (2) those that tried to defend marginalism, and (3) those that studied full cost pricing but were essentially neutral on whether it refuted marginalist theory:
But Milton Friedman’s escape route – that a theory should merely make correct predictions rather than provide realistic explanations (Downward 1999: 121) – was unacceptable, and itself methodologically unsound.
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Friedman, M. 1953. “The Methodology of Positive Economics,” in M. Friedman, Essays in Positive Economics. University of Chicago Press, Chicago.
Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.
Downward is clear that non-econometric empirical evidence is needed to properly understand the causal processes involved in explaining mark-up pricing by businesses (Downward 1999: 114).
Hall and Hitch (1939) were some of the first economists to do this type of survey. They concluded that the firms they surveyed did not attempt to base price on marginal cost, but set price on the basis of full average costs (determined by means of an estimated or projected level of output) with a profit mark-up, although the price and mark-up were influenced by competing firms (Downward 1999: 115).
The work of Hall and Hitch (1939) and other surveys on full cost pricing provoked a controversy in mainstream economics in the 1940s and 1950s called the “full cost”/ “marginal controversy.”
One of the most useful parts of this chapter is Downward’s review of this literature (Downward 1999: 117–120).
As Downward notes, the value of direct surveys of firms on how they set prices – the qualitative studies – lies not just in evidence on how prices are actually set, but in showing the causal processes that determine this behaviour (Downward 1999: 124).
The main surveys and articles in the “full cost” debate can be seen below in the order of (1) those that attacked and argued against the marginalist theory of pricing, (2) those that tried to defend marginalism, and (3) those that studied full cost pricing but were essentially neutral on whether it refuted marginalist theory:
Against MarginalismTo this list, I would also add the following:
Kaplan, A. D. H., Dirlam, J. B. and Lanzillotti, R. F. 1958. Pricing in Big Business: A Case Approach. The Brookings Institution, Washington DC.
Lanzillotti, Robert F. 1958. “Pricing Objectives in Large Companies,” American Economic Review 48.5: 921–940.
Kahn, Alfred E. 1959. “Pricing Objectives in Large Companies: Comment,” American Economic Review 49.4: 670–678.
Lanzillotti, Robert F. 1959. “Pricing Objectives in Large Companies: Reply,” American Economic Review 49.4: 679-687.
Barback, R. H. 1964. Pricing of Manufactures. Macmillan and Co Ltd., London.
Wentz, Theodore E. 1966. “Realism in Pricing Analyses,” Journal of Marketing 30.2: 19–26.
Skinner, R. C. 1970. “The Determination of Selling Prices,” Journal of Industrial Economics 18.3: 201–217.
Sizer, John. 1971. “Note on ‘the Determination of Selling Prices,’” The Journal of Industrial Economics 20.1: 85–89.
Hague, D. C. 1971. Pricing in Business. George Allen and Unwin, London.
Burck, G. 1972. “The Myths and Realities of Corporate Pricing,” Fortune 85.4: 85–89, 125–126.
Atkin, B. and Skinner, R. 1975. How British Industry Prices. Industrial Market Research Limited, London.
Shipley, David D. 1981. “Pricing Objectives in British Manufacturing Industry,” The Journal of Industrial Economics 29.4: 429–443.
Gordon, L. A., Cooper, R., Falk, H., and D. Miller. 1981. The Pricing Decision. National Association of Accountants, New York.
Hankinson, A. 1985. A Study of Pricing Behaviour of Dorset-Hampshire Small Engineering Firms. Dorset Institute of Higher Education, Poole, Dorset.
Bruegelman, T., Haessly, G., Wolfangel, C. P. and Schiff, M. 1985. “How Variable Costing is used in Pricing Decisions,” Management Accounting 66: 58–61, 65.
Samiee, S. 1987. “Pricing in Marketing Strategies of US- and Foreign-based Firms,” Journal of Business Research 15: 17–30.
Defending Marginalism
Gordon, R. A. 1948. “Short Period Price Determination in Theory and Practice,” American Economic Review 38: 265–288.
Hague, D. C. 1949–1950. “Economic Theory and Business Behaviour,” Review of Economic Studies 16: 144–157.
Edwards, R. S. 1952. “The Pricing of Manufactured Products,” Economica 19: 298–307.
Simon, H. A. 1952. “A Behavioural Model of Rational Choice,” Quarterly Journal of Economics 69: 99–118.
Simon, H. A. 1959. “Theories of Decision Making in Economies,” American Economic Review 49: 253–283.
Shackle, G. L. S. 1955. “Businessmen on Business Decisions,” Scottish Journal of Political Economy 2: 32–46.
Earley, James S. 1956. “Marginal Policies of ‘Excellently Managed’ Companies,” American Economic Review 46.1: 44–70.
Cook, A. C., Dufty, N. F. and Jones, E. H. 1956. “Full Cost Pricing in the Multiproduct Firm,” The Economic Record 32: 142–147.
Pearce, I. F. 1956. “A Study in Price Policy,” Economica n.s. 23.90: 114–127.
Pearce, I. F. and Amey, L. R. 1956–1957. “Price Policy with a Branded Product,” The Review of Economic Studies 24: 49–60.
Fog, B. 1960. Industrial Pricing Policies: An Analysis of Pricing Policies of Danish Manufacturers. North Holland Publishing, Amsterdam.
Knox, R. L. 1966. “Competitive Oligopolistic Pricing,” Journal of Marketing 30: 47–51.
Neutral Studies
Alt, R. M. 1949. “The Internal Organisation of the Firm and Price Formation: An Illustrative Case,” Quarterly Journal of Economics 63: 92–110.
Woodruff, W. 1953. “Early Entrepreneurial Behaviour in Relation to Costs and Prices,” Oxford Economic Papers 5: 41–64.
Blackwell, R. 1953–1954. “The Pricing of Books,” Journal of Industrial Economics 2: 174–183.
Cook, A. and Jones, F. 1954. “Full Cost Pricing in Western Australia,” The Economic Record 30: 272–274.
Balkin, N. 1956. “Prices in the Clothing Industry,” Journal of Industrial Economics 5.1: 1–15.
Lazer, W. 1956–1957. “Price Determination in the Western Canadian Garment Industry,” Journal of Industrial Economics 5: 124–136.
Pool, A. G. and Llewellyn, G. 1957. The British Hosiery Industry: A Study in Competition. Leicester University Press, Leicester.
Lydall, H. F. 1958. “Aspects of Competition in Manufacturing Industry,” Institute of Economics and Statistics Bulletin 20: 319–337.
Haynes, W. W. 1962. Pricing Decisions in Small Business. University of Kentucky Press, Lexington, KY.
Haynes, W. W. 1964. “Pricing Practices in Small Firms,” The Southern Economic Journal 30: 315–324.
Lanzillotti, R. F. 1964. Pricing Production and the Marketing Policies of Small Manufacturers. Washington State University Press, Pullman, Washington.
Rosendale, R. B. 1973. “The Short Run Pricing Policies of Some British Engineering Exporters,” National Institute Economic Review 65: 44–51.
Nowotny, Ewald and Herbert Walther. 1978. “The Kinked Demand Curve—Some Empirical Observations,” Kyklos 31: 53–67.
Forgionne, G. A. 1984. “Economic Tools used by Management in Large American Operated Corporations,” Business Economics 19: 5–17.
Jobber, D. and Hooley, G. 1987. “Price Behaviour in the UK Manufacturing Service Industries,” Managerial and Decision Economics 8.2: 167–171.
Smiley, Robert. 1988. “Empirical Evidence on Strategic Entry Deterrence,” International Journal of Industrial Organization 6.2: 167—180.
Blinder, Alan S. 1991. “Why are Prices Sticky? Preliminary Results from an Interview Study,” American Economic Review 81.2: 89–96.
Alchian, A. A. 1950. “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy 58: 211–221.Downward further notes that it was Milton Friedman’s famous article “The Methodology of Positive Economics” (M. Friedman, Essays in Positive Economics. University of Chicago Press, Chicago, 1953) that attempted to settle the “full cost” debate in favour of marginalism.
Robinson, A. 1950. “The Pricing of Manufactured Products,” Economic Journal 60: 771–780.
Machlup, F. 1946. “Marginal Analysis and Empirical Research,” American Economic Review 36: 519–554.
Heflebower, R. F. 1955. “Full Costs, Cost Changes, and Prices,” in National Bureau of Economic Research, Business Concentration and Price Policy. Princeton University Press, Princeton. 361–392.
Coase, R. 1955. “Full Cost, Cost Changes, and Prices: Comment,” in National Bureau of Economic Research, Business Concentration and Public Policy. Princeton University Press, Princeton. 392–394.
Wiles, P. 1950. “Empirical Research and the Marginal Analysis,” Economic Journal 60: 515–530.
Robinson, J. V. 1953. “Imperfect Competition Revisited,” Economic Journal 63: 579–593.
But Milton Friedman’s escape route – that a theory should merely make correct predictions rather than provide realistic explanations (Downward 1999: 121) – was unacceptable, and itself methodologically unsound.
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Friedman, M. 1953. “The Methodology of Positive Economics,” in M. Friedman, Essays in Positive Economics. University of Chicago Press, Chicago.
Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.
Tuesday, January 21, 2014
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 5
Chapter 5 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) deals with a new “synthetic” econometric study on pricing.
Downward takes UK manufacturing prices and prices of industrial factor inputs in the period from 1984 to 1991 in his own econometric study (Downward 1999: 106, with results Table 5.1, Downward 1999: 107).
He finds that costs are the more important factor in influencing the UK manufacturing prices he examined, even if some lesser influence from demand was seen, probably given the bad recession of the early 1990s (Downward 1999: 108).
Downward finds that prices display “considerable inertia” (Downward 1999: 110), and that the last period’s prices are generally carried over into the current period by businesses (Downward 1999: 108).
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Downward takes UK manufacturing prices and prices of industrial factor inputs in the period from 1984 to 1991 in his own econometric study (Downward 1999: 106, with results Table 5.1, Downward 1999: 107).
He finds that costs are the more important factor in influencing the UK manufacturing prices he examined, even if some lesser influence from demand was seen, probably given the bad recession of the early 1990s (Downward 1999: 108).
Downward finds that prices display “considerable inertia” (Downward 1999: 110), and that the last period’s prices are generally carried over into the current period by businesses (Downward 1999: 108).
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 4
Chapter 4 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) deals with econometric studies on pricing.
Downward considers the work of Neild (1963), Eckstein and Fromm (1968), McCallum (1970), Brechling (1972), and Smith (1982).
Downward finds significant problems with the assumptions and models used in all these studies because of their neoclassical economics (Downward 1999: 75–81).
By contrast, Coutts et al. (1978), Sylos-Labini (1979) and Sawyer (1983) provide far better empirical studies with better theoretical foundations, and they find that prices are not strongly influenced by changes in demand (Downward 1999: 82).
Nevertheless, Downward (1999: 88–92) finds serious problems with conventional econometric studies, along the lines of Keynes’ criticisms of econometrics in his dispute with Tinbergen.
Rather, econometric studies should be embedded within a much broader class of empirical evidence on pricing and price setting (Downward 1999: 92).
BIBLIOGRAPHY
Brechling, F. P. R. 1972. “Some Empirical Evidence on the Effectiveness of Prices and Incomes Policies,” in J. M. Parkin and M. T. Sumner (eds.), Incomes Policy and Inflation. Manchester University Press, Manchester.
Coutts, Kenneth, Godley, Wynne and William Nordhaus. 1978. Industrial pricing in the United Kingdom. Cambridge University Press, Cambridge.
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Eckstein, Otto and Gary Fromm. 1968. “The Price Equation,” The American Economic Review 58.5: 1159–1183.
Geroski, P. 1992. “Price Dynamics in UK Manufacturing: A Microeconomic View,” Economica 59: 403–420.
McCallum, B. T. 1970. “The Effect of Demand on Prices in British Manufacturing: Another View,” Review of Economic Studies 37: 147–156.
Neild, R. R. 1963. Pricing and Employment in the Trade Cycle: A Study of British Manufacturing Industry. Cambridge University Press, Cambridge.
Sawyer, M. 1983. Business Pricing and Inflation. Macmillan, London.
Smith, G. W. 1982. “The Normal Cost Hypothesis: A Reappraisal,” in M. J. Artis, C. J. Green, D. L. Leslie, and G. W. Smith (eds.), Demand Management, Supply Constraints and Inflation, Manchester University Press, Manchester. 213–237.
Sylos-Labini, Paolo. 1979. “Prices and Income Distribution in Manufacturing Industry,” Journal of Post Keynesian Economics 2.1: 3–25.
Downward considers the work of Neild (1963), Eckstein and Fromm (1968), McCallum (1970), Brechling (1972), and Smith (1982).
Downward finds significant problems with the assumptions and models used in all these studies because of their neoclassical economics (Downward 1999: 75–81).
By contrast, Coutts et al. (1978), Sylos-Labini (1979) and Sawyer (1983) provide far better empirical studies with better theoretical foundations, and they find that prices are not strongly influenced by changes in demand (Downward 1999: 82).
Nevertheless, Downward (1999: 88–92) finds serious problems with conventional econometric studies, along the lines of Keynes’ criticisms of econometrics in his dispute with Tinbergen.
Rather, econometric studies should be embedded within a much broader class of empirical evidence on pricing and price setting (Downward 1999: 92).
BIBLIOGRAPHY
Brechling, F. P. R. 1972. “Some Empirical Evidence on the Effectiveness of Prices and Incomes Policies,” in J. M. Parkin and M. T. Sumner (eds.), Incomes Policy and Inflation. Manchester University Press, Manchester.
Coutts, Kenneth, Godley, Wynne and William Nordhaus. 1978. Industrial pricing in the United Kingdom. Cambridge University Press, Cambridge.
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Eckstein, Otto and Gary Fromm. 1968. “The Price Equation,” The American Economic Review 58.5: 1159–1183.
Geroski, P. 1992. “Price Dynamics in UK Manufacturing: A Microeconomic View,” Economica 59: 403–420.
McCallum, B. T. 1970. “The Effect of Demand on Prices in British Manufacturing: Another View,” Review of Economic Studies 37: 147–156.
Neild, R. R. 1963. Pricing and Employment in the Trade Cycle: A Study of British Manufacturing Industry. Cambridge University Press, Cambridge.
Sawyer, M. 1983. Business Pricing and Inflation. Macmillan, London.
Smith, G. W. 1982. “The Normal Cost Hypothesis: A Reappraisal,” in M. J. Artis, C. J. Green, D. L. Leslie, and G. W. Smith (eds.), Demand Management, Supply Constraints and Inflation, Manchester University Press, Manchester. 213–237.
Sylos-Labini, Paolo. 1979. “Prices and Income Distribution in Manufacturing Industry,” Journal of Post Keynesian Economics 2.1: 3–25.
Saturday, January 18, 2014
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 3
Chapter 3 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) provides an assessment of Post Keynesian price theory, a review of the literature, and identifies the fundamental theoretical core of this price theory.
Downward provides a literature review of a sample of the work on mark-up prices – beginning with the early literature – including the studies of Gardiner C. Means; R. L. Hall and C. J. Hitch; P. W. S. Andrews; Michał Kalecki; Athanasios Asimakopulos; K. Cowling and M. Waterson and Alfred Eichner.
This is a very useful part of Downward’s book and I will summarise it below.
In contrast, the work of Gardiner C. Means, R. L. Hall and C. J. Hitch, P. W. S. Andrews, and Michał Kalecki is regarded by Downward as fundamentally sound and a foundation for Post Keynesian price theory, even though they all still retain some mistaken marginalist ideas and their theories can be invoked by neoclassicals in a misleading way (Downward 1999: 62–63).
What, then, is the core of Post Keynesian mark-up pricing theory, as argued by Downward?
It is the following:
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Downward provides a literature review of a sample of the work on mark-up prices – beginning with the early literature – including the studies of Gardiner C. Means; R. L. Hall and C. J. Hitch; P. W. S. Andrews; Michał Kalecki; Athanasios Asimakopulos; K. Cowling and M. Waterson and Alfred Eichner.
This is a very useful part of Downward’s book and I will summarise it below.
(1) Gardiner C. MeansDownward’s conclusion after a review of this literature is that the work of Cowling and Waterson, Asimakopulos and Eichner cannot be regarded as part of the “core” of Post Keynesian price theory, because they “share essential characteristics of the neoclassical approach in terms of their core assumptions” (Downward 1999: 60).Berle, Adolf A. and Gardner C. Means. 1932. The Modern Corporation and Private Property. Macmillan, New York.Gardiner C. Means studied price setting by modern corporations in the United States, and was one of earliest and most important economists who examined mark-up pricing. He coined the term “administered pricing” to describe it.
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.
He concluded, after extensive empirical research, that prices of goods produced in many corporations are set by administrative fiat before transactions occur. They are also set as a mark-up on cost of production (Downward 1999: 50). While administered prices might change when costs change, they are relatively inflexible with respect to demand.
Means 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).(2) Hall and Hitch
“... 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).Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.The Oxford Economists’ Research Group (OERG) was a group of researchers that was instituted at Oxford University in 1936, and involved economists such as Hubert Henderson, James Meade, and George L. S. Shackle.
Hall and Hitch were part of the Oxford Economists Research Group, and their empirical research work led them to postulate the “full cost” theory of pricing. That is, the view that many prices in modern market economies are set by business people by taking variable/direct/price costs per unit as a base for the price, and then adding an allowance to cover overhead costs and finally a mark-up as a profit allowance (Downward 1999: 46).
The determinant of the percentage mark-up for profit is historically specific in each industry and often a matter of convention, even though competition does constrain the price of the same mark-up product in a particular market (Downward 1999: 46).
Hall and Hitch, then, contended that many prices were quite stable instead of normally varying with demand, were based on “full cost” (average variable costs and overhead costs), and that the mark-up and price is constrained by competition (Downward 1999: 46–47).
(3) Michał KaleckiKalecki, M. 1939. Essays in the Theory of Economic Fluctuations. Allen and Unwin, London.Michał Kalecki’s work on prices shows an evolution over the course of his life. In some respects, his theory was not wholly divorced from marginalism. Hall and Hitch’s work influenced Kalecki’s views on prices (Downward 1999: 51).
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.
Kalecki (1939) treats mark-up prices as set by means of production costs and profit. He also noted the important role of excess capacity in industries.
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; andMost finished goods are cost determined, while many raw materials and primary commodities are demand determined (that is, flexprice markets).
(2) demand determined prices.
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).
(4) P. W. S. AndrewsAndrews, P. W. S. 1949 “A Reconsideration of the Theory of the Individual Business,” Oxford Economic Papers n.s. 1.1: 54–89.P. W. S. Andrews was a member of the Oxford Economists’ Research Group (OERG), and his work was a great influence on Eichner.
Andrews, P. W. S. 1949a. Manufacturing Business. Macmillan, London.
Andrews, P. W. S. 1964. On Competition in Economic Theory. Macmillan, London.
Andrews coined the term “normal cost” pricing, even though this was used synonymously with “full cost” pricing (Downward 1999: 47).
Andrews argued that it was normal for many firms to have excess capacity, a constant average variable/direct/prime curve, and that use of excess capacity is a phenomenon designed to meet uncertain changes in market conditions (Downward 1999: 47).
Generally, changes in costs related to changes in scale of output (say, overtime payments) will not normally change the price since as output rises total average costs fall (Downward 1999: 48).
The mark-up for profit is calculated at a planned or expected quantity of output. Of course, actual sales will determine the actual profit margin and profit mark-up in any given accounting period, but if sales fall below the expected quantity, this does not even necessarily result in price changes. Many businesses will set a projected output/sales level, base their price on this quantity, and maintain the price despite changes in demand: the normal rule is that the price is set and demand is met at that price from inventories or excess capacity (Downward 1999: 49).
Mark-up pricing is 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).
(5) Athanasios AsimakopulosAsimakopulos, A. 1975. “A Kaleckian Theory of Income Distribution,” Canadian Journal of Economics / Revue canadienne d’Economique 8.3: 313–333.Asimakopulos’s work as cited by Downward is more a refinement of Kalecki’s theory (Downward 1999: 55), with an amended pricing equation and the observation that many mark-up businesses face a price leader that constrains price.
(6) K. Cowling and M. WatersonCowling, Keith, and Michael Waterson. 1976. “Price-Cost Margins and Market Structure,” Economica 43.171: 267–274.Cowling and Waterson (1976) represents an attempt to develop Kalecki’s work on pricing and the mark-up, but seems of doubtful importance to modern Post Keynesian economics, since it retains core features of neoclassical theory (Downward 1999: 57).
(7) Alfred EichnerEichner, A. S. 1973. “A Theory of the Determination of the Mark-up under Oligopoly,” Economic Journal 83.332: 1184–1200.Alfred Eichner’s pricing theory was intended as a model for the core corporate oligopolistic sector of the US economy and sought to develop Kalecki’s work.
Eichner, A. S. 1976. The Megacorp and Oligopoly. Cambridge University Press, Cambridge.
Eichner, A. S. 1980. “A General Model of Investment and Pricing,” in E. J. Nell (ed.), Growth, Profits and Property. Cambridge University Press, Cambridge.
Eichner, A. S. 1991. The Macrodynamics of Advanced Market Economies. M. E. Sharpe, New York.
Eichner argued that one important purpose of mark-up prices was to enable firms to finance investment and long run growth (Downward 1999: 58), and Eichner treats corporate dividends as part of fixed costs (Downward 1999: 58).
In contrast, the work of Gardiner C. Means, R. L. Hall and C. J. Hitch, P. W. S. Andrews, and Michał Kalecki is regarded by Downward as fundamentally sound and a foundation for Post Keynesian price theory, even though they all still retain some mistaken marginalist ideas and their theories can be invoked by neoclassicals in a misleading way (Downward 1999: 62–63).
What, then, is the core of Post Keynesian mark-up pricing theory, as argued by Downward?
It is the following:
(1) mark-up prices are set by businesses in an ex ante manner before trade and transactions to achieve objectives in an uncertain world, such as financing for investment;BIBLIOGRAPHY
(2) they are set by a convention involving calculation of average unit variable/direct costs and average overhead/fixed costs plus profit mark-up;
(3) prices are likely to change from cost changes, not demand changes, but they do not “automatically” rise just because cost changes happen.
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Friday, January 17, 2014
Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 2
Chapter 2 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) deals with methodological issues in Post Keynesian economics, and I will not go into too much detail here.
There are a few methods proposed in Post Keynesian methodology, as I have briefly sketched here, and they are as follows:
At any rate, Downward sees critical realism – as in the work of Sheila Dow and Tony Lawson – as the basis for his methodological approach (Downward 1999: 11).
Critical realism, according to Downward, makes uses of induction, deduction and retroduction (Downward 1999: 12), and it is supposed to provide an “open system” approach to the study of phenomena in the social sciences, as opposed to the “closed system” approach of neoclassical economics, which sees events as having causes that are constant and unchanging and which relies heavily on deduction and formal axiomatic reasoning (Downward 1999: 15). In essence, this “closed system” method is appropriate for the natural sciences, but highly questionable when carried over into the social sciences (Downward 1999: 15–16).
For example, the theoretical core of neoclassical economics with its “closed system” approach assumes the following:
In contrast, one of the “core” tenets of Post Keynesianism is the empirically grounded notion that agents face fundamental uncertainty and that this affects economic life (Downward 1999: 21).
Downward is also clear that critical realism – even in Sheila Dow’s “pluralist” version – does not entail postmodernism (Downward 1999: 19; 24).
Critical realism implies a realist view of the external world and a correspondence theory of truth (Downward 1999: 23–24).
In trying to explain prices, Downward emphasises that economic agents face uncertainty, expectations are very important in decision making, and institutions, customs and conventions have a strong influence on economic life (Downward 1999: 39).
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
There are a few methods proposed in Post Keynesian methodology, as I have briefly sketched here, and they are as follows:
(1) Critical realism;I myself see the Post Keynesian method as generally “realist” and heavily empiricist, although I increasingly see some merit in Karl Popper’s Critical Rationalism, and Popper’s ontological ideas.
(2) the “Babylonian” or “pluralist” approach of Sheila Dow, which can be construed as a variant of (1), and
(3) Paul Davidson’s “generalising” methodology.
At any rate, Downward sees critical realism – as in the work of Sheila Dow and Tony Lawson – as the basis for his methodological approach (Downward 1999: 11).
Critical realism, according to Downward, makes uses of induction, deduction and retroduction (Downward 1999: 12), and it is supposed to provide an “open system” approach to the study of phenomena in the social sciences, as opposed to the “closed system” approach of neoclassical economics, which sees events as having causes that are constant and unchanging and which relies heavily on deduction and formal axiomatic reasoning (Downward 1999: 15). In essence, this “closed system” method is appropriate for the natural sciences, but highly questionable when carried over into the social sciences (Downward 1999: 15–16).
For example, the theoretical core of neoclassical economics with its “closed system” approach assumes the following:
(1) rational agents (in the sense of having consistent transitive rankings of preferences);For Downward, the essence of the realist “open system” approach is to reject these assumptions and to argue that they do not apply to the real world (Downward 1999: 17).
(2) who are well informed;
(3) who strive to maximise ordinal utility;
(4) and who act in a system that has tendencies to coordination and equilibrium. (Downward 1999: 16).
In contrast, one of the “core” tenets of Post Keynesianism is the empirically grounded notion that agents face fundamental uncertainty and that this affects economic life (Downward 1999: 21).
Downward is also clear that critical realism – even in Sheila Dow’s “pluralist” version – does not entail postmodernism (Downward 1999: 19; 24).
Critical realism implies a realist view of the external world and a correspondence theory of truth (Downward 1999: 23–24).
In trying to explain prices, Downward emphasises that economic agents face uncertainty, expectations are very important in decision making, and institutions, customs and conventions have a strong influence on economic life (Downward 1999: 39).
BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
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