Where Gardiner Means went Wrong

It was in his interpretation of Keynes’ General Theory, and this is clear in Means’ brief article “Which was the True Keynesian Theory of Employment?” (Challenge 19.3 [1976]: 61–63).

When the General Theory of Employment, Interest and Money (1936) was published, Gardiner C. Means – the originator of the administered price thesis – was unclear about what Keynes’ fundamental arguments against the neoclassical system actually were, and whether the theory depended on inflexible wages and prices.

This is illustrated by a fascinating piece of forgotten history told by Means himself: his visit to John Maynard Keynes in July 1939:

“In the summer of 1939, on my way to a holiday in Norway, I made it a point to visit Keynes with the specific purpose of asking him to what extent his explanation of persistent unemployment rested on an assumption of wage-rate or price inflexibility. His answer was a categorical: ‘Not at all.’ I asked the question in several different ways in order to make sure there was no failure of minds to meet and the answer was always the same. I said, ‘Suppose that prices and wage-rates met the classical assumption of perfect flexibility so that, if there were excessive unemployment, the price-wage level would fall frictionlessly. Then with the nominal money stock remaining constant, wouldn’t the rise in the real value of the money stock create added demand which would tend to absorb unemployed workers?’ But still the answer was no. Once interest rates had fallen to their limit there would be no further corrective. We were in complete agreement that, in practice, neither prices nor wage-rates were as flexible as classical theory assumed, but he insisted that his theory of unemployment did not depend at all on this fact.” (Means 1976: 61–62).

Despite these emphatic statements by Keynes, Lee (2000: 403) notes that Means was dissatisfied with Keynes’ replies (see also Ware 1992 for another account of the meeting).

Later, Means (1976) defended the neoclassical synthesis interpretation of the General Theory contrary to the explicit answers Keynes had given to him in 1939, because Means continued to believe in the efficacy of the real balances effect (Means 1976: 63).

Had Means properly read and understood Chapter 19 of the General Theory, he would not have made this error.

What also emerges from this article is that Means himself sent a draft of his famous Senate document “Industrial Prices and their Relative Flexibility” (1935) to Keynes, and Keynes even asked him to publish a version of this in the Economic Journal (of which Keynes was the editor), though Means was unable to do this (Means 1976: 61).

Keynes, then, must have been aware of the empirical evidence on administered prices by the mid-1930s, and he was explicitly aware of them in his work on buffer stocks in 1938 (Keynes 1938: 452–453).

BIBLIOGRAPHY
Keynes, J. M. 1938. “The Policy of Government Storage of Foodstuffs and Raw Materials,” Economic Journal 48.191: 449–460.

Lee, F. 2000. “Gardiner C. Means (1896–1988),” in Philip Arestis and Malcolm Sawyer (eds.), A Biographical Dictionary of Dissenting Economists (2nd edn.), Edward Elgar, Cheltenham, UK and Northampton, MA. 399–405.

Means, Gardiner C. 1935. “Industrial Prices and their Relative Flexibility,” Senate Document no 13. 74th Congress, 1st Session, 17 January.

Means, Gardiner C. 1976. “Which was the True Keynesian Theory of Employment?,” Challenge 19.3 (July/August): 61–63.

Ware, C. 1992. “Academic Resistance to Administered Prices,” in Frederic S. Lee and Warren J. Samuels (eds.), The Heterodox Economics of Gardiner C. Means: A Collection. M.E. Sharpe, Armonk, N.Y. 337–348.

Mark-up Pricing in France

Loupias and Ricart (2004) report the results of a survey on price setting behaviour by French firms (see also Loupias and Ricart 2007).

The survey was conducted during the winter of 2003–2004 by the Banque de France and involved 1,662 manufacturing firms (Loupias and Ricart 2004: 8).

In line with other surveys, it was found that it is difficult to question firms about their marginal costs (since the concept is hard to explain to business people!) and marginal cost is itself difficult to calculate (Loupias and Ricart 2004: 11).

As a substitute for marginal cost, the survey instead asked firms about their unit variable costs, and 36% of firms reported that their unit variable costs are constant (Loupias and Ricart 2004: 11).

Firms were asked how many times they changed the prices of their main product in 2003, and the following results were found:

No change | 21.1%
Once | 46.3%
Twice | 19.9%
3 to 6 times | 7.7%
7 to 12 times | 2.1%
(Loupias and Ricart 2004: 48, Table 5.1.2).

Most firms, then, only changed their product price once in the previous year, and a significant 21.1% not at all, which indicates a high level of relative price rigidity.

Furthermore, prices are more likely to rise than fall: price increases accounted for around 70% of price changes in 2004 (Loupias and Ricart 2004: 25). This is explained by a clear price asymmetry: prices are more rigid downward than upward when cost shocks occur, but when demand shocks occur more rigid upward than downward (Loupias and Ricart 2004: 26, 28–29). That is to say, many firms, when their costs decline, merely prefer to leave prices unchanged (Loupias and Ricart 2004: 27) and enjoy a higher profit mark-up, rather than cut prices.

The firms were asked how they set the price for their main product. The results were as follows:

Mark-up on unit variable costs (with prices different from competitors) | 36.9%
Competitors’ prices | 35.1%
Regulated price | 4%
Other | 17.1%
(Loupias and Ricart 2004: 45, Table 4.1).

Though mark-up pricing is reported only at 36.9% (which is lower than findings from other national surveys), it seems clear that the “competitors’ prices” category also conceals other mark-up prices too, as mark-up pricing firms which follow “price leaders” often tend to report their pricing strategy in this category (as the evidence from Ireland and Norway suggests).

When asked to rank the importance of ten theories explaining why prices change and do not change, by scoring them from 1 (unimportant) to 4 (very important), the following results were obtained with theories ranked from the most important to least important:

(1) Cost-based pricing
(2) Coordination failure
(3) Nominal contracts
(4) Implicit contracts
(5) Temporary shocks
(6) Demand shock
(7) Number of competitors
(8) Pricing points
(9) Stock/delivery
(10) Physical menu costs
(Loupias and Ricart 2004: 47, Table 6.1).

Cost-based pricing was chosen as the clear winner in this survey.

Although there is evidence that considerably more French firms respond to demand shocks than in other countries (Loupias and Ricart 2004: 27), nevertheless one can note the “demand shock” was not very high on the list.

BIBLIOGRAPHY
Loupias, Claire and Roland Ricart. 2004. “Price Setting in France: New evidence from Survey Data,” ECB Working Paper Series No. 423
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp423.pdf

Loupias, Claire and Roland Ricart. 2007. “Asymmetries in Price Setting: Some Evidence from French Survey Data,” in S. Fabiani, C. Suzanne Loupias, F. M. Monteiro Martins and Roberto Sabbatini (eds.), Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York. 83–96.

Mark-up Pricing in Austria

Kwapil, Baumgartner and Scharler (2005) report the results of a survey of price setting behaviour by Austrian firms (with a summary in Kwapil, Baumgartner and Scharler 2007).

The survey was conducted in January 2004 by the Austrian Institute of Economic Research (WIFO) and 873 firms participated, which were mainly in the manufacturing and manufacturing-related services sectors, and often producing intermediate goods (Kwapil, Baumgartner and Scharler 2005: 9–11). Of these firms, 715 had direct control over their price setting policy (rather than a parent company), so that Kwapil et al.’s analysis was restricted to these firms (Kwapil, Baumgartner and Scharler 2005: 11). The firms were asked about price setting involving their main product or service.

Around 68% of the firms generally used time-dependent pricing, and carried out price reviews at regular time intervals (Kwapil, Baumgartner and Scharler 2005: 14).

Furthermore, the percentages for firms reporting a specific time interval in time-dependent pricing are as follows:

Yearly reviews | 25.5%
Half-yearly reviews | 17.5%
Quarterly reviews | 28.4%
(Kwapil, Baumgartner and Scharler 2005: 16).

The firms were also asked how often they changed prices on average in a given year. The results were as follows:

No change | 22.1%
Once a year | 54.2%
2 to 3 times a year | 13.9%
(Kwapil, Baumgartner and Scharler 2005: 18).

The main finding, then, is that the median firm in the survey reviewed its prices quarterly but only adjusted its prices once a year.

Firms were also asked to rank 11 different theories of why prices are generally inflexible by assigning each theory a score from 4 (strong agreement as important) to 1 (disagreement that it was important).

The top 5 theories were as follows:

Theory | Mean Score
(1) Implicit contracts | 3.04
(2) Explicit contracts | 3.02
(3) Cost-based pricing | 2.72
(4) Kinked demand curve | 2.69
(5) Coordination failure | 2.47
(Kwapil, Baumgartner and Scharler 2005: 26).

Cost-based pricing came out at number 3, and clearly scored highly.

The importance of cost-based pricing was confirmed in another question about what were the main factors in driving prices upwards. It was found that 83% of firms said wage costs and 70% said costs of intermediate goods were the most important factors causing price increases, but changes in demand scored only about 25% (Kwapil, Baumgartner and Scharler 2005: 29–30).

The most important factors driving price decreases were changes in competitors’ prices (57%), productivity improvement (44%), and prices of intermediate goods (41%), but changes in demand scored only about 30% (Kwapil, Baumgartner and Scharler 2005: 29–30).

Cost-based pricing appears to have the consequence that prices are more flexible upwards than downwards when cost shocks occur (Kwapil, Baumgartner and Scharler 2005: 34).

It was further found that 63% of firms would leave their prices unchanged in response to a large positive demand shock, and 52% would leave prices unchanged in response to a large negative demand shock (Kwapil, Baumgartner and Scharler 2005: 33). In the face of small demand shocks (either positive or negative), 82% of firms simply leave prices unchanged (Kwapil, Baumgartner and Scharler 2005: 33).

Kwapil, Baumgartner and Scharler (2007: 63) also reports that 60 to 80% of firms reported that they react to demand shocks (whether perceived to be temporary or permanent) by simply adjusting investment and the level of factor inputs, not prices. This is strong confirmation of the Keynesian view that most firms react to demand changes by directly altering employment and production levels.

BIBLIOGRAPHY
Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp464.pdf

Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2007. “Price Reactions to Demand and Cost Shocks: Survey Evidence from Austrian Firms,” in S. Fabiani, C. Suzanne Loupias, F. M. Monteiro Martins and Roberto Sabbatini (eds.), Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York. 55–68.

Mark-up Pricing in the UK

Though I have briefly examined this subject before, much more can be said, given the range of evidence.

In what follows, I review:

(1) Hall, Walsh, and Yates (2000),

(2) Greenslade and Parker (2012), and

(3) finally Downward (1999, Chapter 8).

Hall, Walsh, and Yates (2000) report the results of a survey of 654 UK companies in 1995 carried out by the Bank of England, and mostly of large companies in manufacturing (68% of the survey), as well as some in services (13%), retailing (13%), and construction (6%) (Hall, Walsh, and Yates 2000: 426–428).

The survey found that 79% of firms used time-dependent pricing, and reviewed prices at specific frequencies (Hall, Walsh, and Yates 2000: 432). Furthermore, 28% of companies reviewed their prices only once a year and about 19% only quarterly (Hall, Walsh, and Yates 2000: 430).

About 37% of companies had changed their prices once in the year period before the survey, and about 27% twice (Hall, Walsh, and Yates 2000: 431).

The survey also asked firms if they recognised a specific “pricing theory as being important” for explaining their pricing behaviour. The most important results were as follows:

Theory | Percentage recognition
Constant marginal costs | 53.8%
Cost-based pricing | 47.1%
Implicit contracts | 45.4%
Explicit contracts | 43.7%
Procyclical elasticity | 35.3%
Pricing thresholds | 34.4%
Non-price elements | 24.2%
Stock adjustment | 22.9%
Coordination failure | 22%
Price means quality | 18.5%
Physical menu costs | 7.3%. (Hall, Walsh, and Yates 2000: 436).

It should be noted that the most important of these “theories” are compatible, not mutually exclusive.

Next the firms were asked to rank how important these theories were on a scale of 1 (high) to 7 (low). The rankings from most important to least important can be seen below :

Theory | Placing
Explicit contracts | 1
Cost-based pricing | 2
Coordination failure | 3
Pricing thresholds | 4
Implicit contracts | 5
Constant marginal costs | 6
Stock adjustment | 7
Non-price elements | 8
Procyclical elasticity | 9
Price means quality | 10
Physical menu costs | 11 (Hall, Walsh, and Yates 2000: 436).

It can be seen that cost-based pricing/mark-up pricing was the second most important reason given, though it is perfectly compatible with “explicit contracts” and “coordination failure” (the failure to raise prices because firms fear competitors will not do so, or lower prices for fear of setting off a price war).

Firms are required often to make fixed nominal contracts which generally fix prices for the customer, and this is an important reason as well as cost-based pricing for price rigidity (Hall, Walsh, and Yates 2000: 438).

Also notable in the findings is that UK companies in the survey report constant marginal costs (Hall, Walsh, and Yates 2000: 437).

A minor cause of price rigidity is the idea that “price means quality”: if a firm lowers prices customers may interpret it as a signal that goods have declined in quality. But this seems to be important only in markets for luxury goods (Hall, Walsh, and Yates 2000: 440).

Like so many studies, the New Keynesian idea of “menu costs” received the lowest ranking: it appears to be dubious or, at best, of marginal importance in explaining price rigidity (Hall, Walsh, and Yates 2000: 440).

Most interesting are the results on what is the most common cause of rises or falls in price.

First, what most often causes prices rises? The main results were as follows:

Factor | Percentage of firms
Increase in material costs | 64%
Rival price rise | 16%
Rise in demand | 15% (Hall, Walsh, and Yates 2000: 441).

Only 15% of firms report that demand is a major cause of price rises, and the overwhelming majority attribute price rises to increase in costs of production: a finding that strongly confirms that mark-up pricing is most probably the most prevalent form of pricing in the sampled firms.

Secondly, what most often causes prices falls?

Factor | Percentage of firms
Rival price fall | 36%
Decrease in material costs | 28%
Fall in demand | 22% (Hall, Walsh, and Yates 2000: 441).

Factors (1) and (2) are also consistent with mark-up pricing, since mark-up firms frequent must follow a price leader in setting prices.

What emerges from this is also that rises in production costs are far more likely to cause price increases than cost decreases are to cause price decreases: that is, there is a bias towards upwards – rather than downwards – movements in prices in modern market economies (Hall, Walsh, and Yates 2000: 443).

Firms were also asked: what happens when there is strong demand and this cannot be met from inventories or stocks?

The result was as follows:

Increase overtime | 62%
Hire more workers | 12%
Increase price | 12%
More capacity | 8% (Hall, Walsh, and Yates 2000: 442).

Since increasing overtime or hiring more workers implies that machines or factories will be used to a greater extent than before, then these factors seem to effectively mean an increase in capacity utilisation, which is clearly the main response to booms in demand.

Only a small 12% of firms would increase prices.

This completes the findings of Hall, Walsh, and Yates (2000).

Next, I turn to Greenslade and Parker (2012).

Greenslade and Parker (2012) report the results of a new survey of 693 UK firms (conducted in December 2007 and February 2008) chosen to be representative of the private sector economy of the UK as a whole, including manufacturing, electricity and gas supply, construction, services, and retail trade, but excluding public sector firms or those under regulatory price control (Greenslade and Parker 2012: F13–F14).

An interesting finding is that price rigidity is greater in manufacturing and services than in the trade sector, which has also been found in Eurozone studies (Greenslade and Parker 2012: F4–F5).

When asked how prices for their main product were determined, 68% of firms said that competitors’ prices were “very important” or “important” in determining price (Greenslade and Parker 2012: F9).

The second most important explanation was mark-up pricing, with variable mark-ups (58%) and constant mark-ups (44%) both being important (Greenslade and Parker 2012: F10).

As we have seen, since mark-up pricing industries often rely on a price leader or leaders, the first finding about “competitors’ prices” does not contradict the second finding on cost-based pricing, but is consistent with it.

The main explanations for price stickiness were coordination failure, the need to avoid antagonising customers, and explicit and implicit contracts (Greenslade and Parker 2012: F12).

Finally, Downward (1999, Chapter 8) presents a survey of 283 UK manufacturing enterprises (Downward 1999: 150–151). 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).

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

Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.

Lee, F. 1995. “From Post-Keynesian to Historical Price Theory, Part 2,” Review of Political Economy 7.1: 72–124.

Austrians and their Incoherent Views on Administered Prices

Of the very few writings by Austrian economists or those heavily influenced by Austrian economics that mention (or supposedly mention) the concept of administered prices/mark-up prices, one can list the following:

(1) Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala. pp. 163–164.

(2) Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman 39–41.
http://www.fee.org/the_freeman/detail/the-bogey-of-administered-prices#axzz2s3nbZRZX

Rothbard, M. N. 2009 [1962]. Man, Economy, and State, The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala. 662–664.

(3) Hazlitt, Henry. 1965. What You Should Know About Inflation (2nd edn.). D. Van Nostrand Company Inc. London and New York. 88–90.

(4) Howard, Irving E. 1966. “Will the Real Price Administrator Please Stand Up!,” The Freeman April 1: 46–50.
http://www.fee.org/the_freeman/detail/will-the-real-price-administrator-please-stand-up#axzz2s3nbZRZX

(5) Poirot, Paul L. 1971. “Cost-Plus Pricing,” The Freeman, January 1: 48–50.
http://www.fee.org/the_freeman/detail/cost-plus-pricing#axzz2s3nbZRZX

(6) Greaves, Bettina B. 1984. Free Market Economics: A Syllabus. Foundation for Economic Education, Irvington-on-Hudson, NY.

(7) Shapiro, Milton M. 1985. Foundations of the Market Price System. University Press of America, Inc. Lanham, MD and London. 365–366.

(8) Lachmann, Ludwig M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. Walter E. Grinder). Sheed Andrews and McMeel, Kansas City. 238–239.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford. 134.

Lachmann, L. M. 1994. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London. 159–178, at 165–166.

(9) Reisman, George. 1996. Capitalism: A Treatise on Economics. Jameson Books, Ottawa, Ill. and Chicago. 167–169, 200–201, 414–417.

For reasons explained here, Mises (2009 [1953]: 163–164) is neither a description of mark-up pricing nor a refutation of it.

Rothbard (1959: 39–41; 2009 [1962]: 662–664), Hazlitt (1965: 88–90), Howard (1966), Poirot (1971), Greaves (1984), and Shapiro (1985: 365–366) simply constitute unconvincing denials that any such thing as “administered pricing” even exist, and even worse do not even show basic understanding of the doctrine.

But, by the time we come to Lachmann (1977: 238–239; 1986: 134; 1994: 165–166) and Reisman (1996: 167–169, 200–201, 414–417) suddenly there is an embarrassing volte face: now administered pricing and cost-plus pricing is acknowledged as a reality and not only that but also a significant part of the price systems of modern market economies.

So which is it?

It is absurd for any Austrian to say that “Austrians have refuted the existence of administered pricing,” because two major Austrian economists have frankly admitted their existence and economic significance.

Yet another confusion about what Austrians think about administered prices stems from George Reisman’s Capitalism: A Treatise on Economics (1996), where administered prices are mentioned on p. 417 in a context that suggests that Böhm-Bawerk somehow anticipated the doctrine, when he did not.

Further Reading
“Lachmann and Post Keynesianism on Prices,” August 1, 2012.

“Caldwell on Lachmann on Equilibrium Prices,” November 6, 2012.

“Mises versus Lachmann on Equilibrium Prices,” December 17, 2012.

“Do Modern Austrians ever Read Lachmann?,” October 13, 2013.

“Böhm-Bawerk had No Theory of Administered Prices,” November 10, 2013.

“Does this Passage show that Mises understood Mark-up Pricing?,” February 1, 2014.

“Rothbard’s Non-Refutation of Administered Prices,” February 1, 2014.


BIBLIOGRAPHY
Greaves, Bettina B. 1984. Free Market Economics: A Syllabus. Foundation for Economic Education, Irvington-on-Hudson, NY.

Howard, Irving E. 1966. “Will the Real Price Administrator Please Stand Up!,” The Freeman April 1: 46–50.
http://www.fee.org/the_freeman/detail/will-the-real-price-administrator-please-stand-up#axzz2s3nbZRZX

Lachmann, Ludwig M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. Walter E. Grinder). Sheed Andrews and McMeel, Kansas City.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Lachmann, L. M. 1994. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London. 159–178.

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.

Poirot, Paul L. 1971. “Cost-Plus Pricing,” The Freeman, January 1: 48–50.
http://www.fee.org/the_freeman/detail/cost-plus-pricing#axzz2s3nbZRZX

Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman 39–41.
http://www.fee.org/the_freeman/detail/the-bogey-of-administered-prices#axzz2s3nbZRZX

Rothbard, M. N. 2009 [1962]. Man, Economy, and State, The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Shapiro, Milton M. 1985. Foundations of the Market Price System. University Press of America, Inc. Lanham, MD and London.

Callahan on Price Rigidity

Gene Callahan has an interesting post here that he regards as a “brief sketch of the Keynesian ‘vision’”:

Gene Callahan, “A Brief Sketch of the Keynesian ‘Vision,’” La Bocca della Verità, February 3, 2014.

His point (5) on price rigidity is a crucial one:

“5) Producers are likely to adjust to this situation [sc., aggregate demand failure] through cutting back on production rather than by making price adjustments, so that the economy spirals down into a recession.”

His comment on this is as follows:

“5) Here is the final spot for a genuine argument against Keynes, and once again it turns out to be an empirical matter: do price adjustments take place rapidly enough in a largely unfettered market that quantity adjustments will play a relatively minor role? If so, a recession will never really build any momentum.”

Callahan seems to be thinking of old neoclassical synthesis Keynesians and New Keynesians here. But it is important to distinguish between the New Keynesian view of price rigidity and that of Post Keynesianism.

Many New Keynesians believe that, if only wages and prices were perfectly flexible, then economies would adjust rapidly to full employment equilibrium. Post Keynesians, following Keynes himself, reject the view that perfectly flexible wages, prices and perfect competition would lead to full employment equilibrium. Even if there were perfectly flexible wages and prices, there could still be failures of aggregate demand (Davidson 1992; Hill: 1996: 377). But let me put that issue entirely to the side, and assume a standard New Keynesian analysis.

One must ask why should a “genuine argument against Keynes” (or, rather, New Keynesians) have to be made with respect to a “largely unfettered market”? Surely the relevant concept is “real world markets.”

Here a mountain of empirical evidence has been available for many years, and it shows that administered prices/mark-up prices/full cost prices are the majority of prices in modern market economies.

Such prices are set by businesses through their cost accounting conventions in an ex ante manner before transactions take place, on the basis of (1) total average unit costs plus (2) a profit mark-up, at a given, estimated, projected or target quantity of output or level of sales (from which of course the ex post or actual quantity of output produced or sold in a given time period might differ).

Empirical evidence shows us that mark-up prices are generally inflexible with respect to demand, but tend to change – though it is by no means a necessary or universal process – when total average unit costs change or when the business wants to change its profit mark-up.

The early empirical work and theory development on administered prices/mark-up prices was done by Gardiner C. Means (1935, 1936, 1939–1940, 1962, 1992 [1933], and 1972, which are discussed here and here), Hall and Hitch (1939) (discussed here and here), P. W. S. Andrews (1949, 1949a, 1964), Kalecki (1954, 1971), A. D. H. Kaplan (Kaplan et el. 1958), and others.

But much more empirical evidence has been done over the past 50 years too (much of it listed here or in Appendix 1 below, including literature from the related “marginalist” controversy), and especially by central bank surveys on price setting over the past 10 years that were inspired by Blinder’s influential direct surveys on US business price setting (Blinder 1998).

The standard Post Keynesian works on mark-up pricing are Lee (1998) and Downward (1999).

The most recent empirical evidence on mark-up pricing in many nations can be seen below, with longer analysis given in separate posts I link to at the end of each “literature” section:

(1) The United States

Literature:
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, R. F. 1964. Pricing Production and the Marketing Policies of Small Manufacturers. Washington State University Press, Pullman, Washington.

Gordon, L. A., Cooper, R., Falk, H., and D. Miller. 1981. The Pricing Decision. National Association of Accountants, New York.

Govindarajan, V. and R. Anthony. 1986. “How Firms use Cost Data in Price Decisions,” Management Accounting 65: 30–34.

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

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.

“Two Marketing Studies on US Administered Prices,” November 16, 2013.

Govindarajan and Anthony (1986) and Shim and Sudit (1995) are two marketing surveys that found that from the 1980s to the 1990s mark-up pricing accounted for roughly 70% to 85% of US industrial prices.

In a much broader and more representative survey for the US economy as a whole, Blinder et al. (1998: 200–201) found that 56.8% of the firms they surveyed said that the idea that prices and price changes depend mainly on costs of production ranked as “very important” (38.8%) or moderately important (18%).

(2) Canada

Literature:
Amirault, D., Kwan, C. and G. Wilkinson. 2004. “A Survey of the Price-Setting Behaviour of Canadian Companies,” Bank of Canada Review 2004/2005: 29–40.
http://www.bankofcanada.ca/2006/09/publications/research/working-paper-2006-35/

“Mark-up Pricing in Canada,” January 7, 2014.

Amirault, Kwan, and Wilkinson (2004) examine price setting in Canada, and report the results of a survey of 170 private, unregulated, non-primary sector firms in the sectors of construction (10%), manufacturing (26%), trade (14%), and services (49%), in a sample which should give representative results for about 70% of Canada’s output in 2002 (Amirault, Kwan, and Wilkinson 2004: 3–4).

An impressive 67.1% of firms surveyed attributed price inflexibility to “cost-based pricing” – that is, to mark-up pricing (Amirault, Kwan, and Wilkinson 2004: 21).

(3) Eurozone

Literature:
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Fabiani, Silvia, Suzanne Loupias, Claire, Monteiro Martins, Fernando Manuel and Roberto Sabbatini. 2007. Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York.

“Administered Prices in the Eurozone: Some Empirical Data,” October 16, 2013.

The wide-ranging survey of Fabiani et al. (2006) and (2007) on prices in the Eurozone from many central bank studies finds that the average for mark-up pricing throughout the Eurozone is 54%, a majority of firm prices.

In goods markets in Germany, the largest economy in Europe, a strikingly high 73% of firms have administered prices (Fabiani et al. 2006: 18, Table 4).

(4) the UK

Literature:
Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.

“Administered Pricing in the United Kingdom,” October 19, 2013.

“Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 8,” January 23, 2014.

Greenslade and Parker (2012), the most recent study, finds that cost-based pricing with variable mark-ups accounted for 58% of firms surveyed.

Downward (1999, Chapter 8) presents a survey of 283 UK manufacturing enterprises (Downward 1999: 150–151). 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).

(5) Norway

Literature:
Langbraaten, Nina, Nordbø, Einar W. and Fredrik Wulfsberg. 2008. “Price-setting Behaviour of Norwegian Firms – Results of a Survey,” Norges Bank Economic Bulletin 79.2: 13–34.
http://www.norges-bank.no/en/about/published/publications/economic-bulletin/economic-bulletin-22008/price-setting-behaviour-of-norwegian-firms--results-of-a-survey/

“Mark-up Pricing in Norway,” November 23, 2013.

Langbraaten et al. (2008) cite a well-sampled survey of 725 firms throughout many sectors of the Norwegian economy that found that 69% of Norwegian businesses use mark-up pricing.

(6) Ireland

Literature:
Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

“Mark-up Pricing in Ireland,” November 22, 2013.

Keeney et al. (2010) report the results of a survey of 1000 Irish firms and finds that the largest type of pricing is mark-up pricing at 44% of firms. Other evidence from their paper, presented in my post here, suggests that the real percentage is higher than this, since when firms were asked how likely it was that they would adjust prices downwards in response to a negative demand shock, 66.5% of firms said that negative demand shocks were of little or no relevance to pricing decisions.

(7) Iceland

Literature:
Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

“Mark-up Prices in Iceland,” November 25, 2013.

Ólafsson et al. (2011) cite a survey of 580 Icelandic firms and finds that mark-up pricing is the largest type of pricing at 45%. Evidence suggests that more mark-up prices are concealed in the other categories in the survey, so that the real percentage is higher than this.

(8) Sweden

Literature:
Apel, Mikael, Friberg, Richard and Kerstin Hallsten. 2005. “Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit and Banking 37.2: 313–338.

“Mark-up Pricing in Sweden,” January 9, 2014.

Apel et al. (2005) provide data on price setting behaviour in Sweden, from a survey of about 600 private sector firms (Apel et al. 2005: 314) weighted to create a more representative sample of the Swedish economy (Apel et al. 2005: 316), but their study fails to directly ask firms how they set price.

Interestingly, when asked why they leave prices unchanged in response to small changes in demand, many firms said “it is better to leave the price unchanged as long as the costs do not change” (Apel et al. 2005: 323), which gives some support to the view that mark-up pricing is important.

(9) Japan

Literature:
Hsu, Robert. 1999. “Pricing Practices in Japan,” Global Business and Economics Review 1.2: 164–171.

Nakagawa, S., R. Hattori and I. Takagawa, 2000. “Price-Setting Behaviour of Japanese Companies,” Bank of Japan Research Paper
http://www.boj.or.jp/en/research/brp/ron_2000/ron0009b.htm/

“Mark-up Pricing in Japan,” November 29, 2013.

Nakagawa and Takagawa (2000) cite a survey of 630 Japanese companies. As interpreted by Fabiani et al. (2007: 190), the data suggest that least 54% of Japanese firms use mark-up pricing.

(10) New Zealand

Literature:
Parker, Miles. “Price-Setting Behaviour in New Zealand”
https://cama.crawford.anu.edu.au/amw2013/doc/Parker,Miles.pdf

“Mark-up Pricing in New Zealand,” November 30, 2013.

Parker cites a survey of around 5,300 New Zealand firms that finds that mark-up prices account for about 54% of business prices.

(11) Australia

Literature:
Park, Anna, Rayner, Vanessa and Patrick D’Arcy. 2010. “Price-Setting Behaviour – Insights from Australian Firms,” Reserve Bank of Australia Bulletin (June Quarter): 7–14.
http://www.rba.gov.au/publications/bulletin/2010/jun/bu-0610-2a.html

“Mark-up Pricing in Australia,” November 30, 2013.

Park, Rayner, and D’Arcy (2010) cite a survey of around 700 Australian firms that finds that mark-up prices account for at least 49% of firm prices. Once we add likely mark-up prices concealed in the other categories in the survey, the percentage will be higher than this.

BIBLIOGRAPHY
Amirault, D., Kwan, C. and G. Wilkinson. 2004. “A Survey of the Price-Setting Behaviour of Canadian Companies,” Bank of Canada Review 2004/2005: 29–40.
http://www.bankofcanada.ca/2006/09/publications/research/working-paper-2006-35/

Andrews, P. W. S. 1949. “A Reconsideration of the Theory of the Individual Business,” Oxford Economic Papers n.s. 1.1: 54–89.

Andrews, P. W. S. 1949a. Manufacturing Business. Macmillan, London.

Andrews, P.W.S. 1964. On Competition in Economic Theory. Macmillan, London.

Apel, Mikael, Friberg, Richard and Kerstin Hallsten. 2005. “Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit and Banking 37.2: 313–338.

Berle, Adolf A. and Gardner C. Means. 1932. The Modern Corporation and Private Property. Macmillan, New York.

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

Davidson, P. 1992. “Would Keynes be a New Keynesian?,” Eastern Economic Journal 18.4: 449–463.

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

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.

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Fabiani, Silvia, Suzanne Loupias, Claire, Monteiro Martins, Fernando Manuel and Roberto Sabbatini. 2007. Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York.

Govindarajan, V. and R. Anthony. 1986. “How Firms use Cost Data in Price Decisions,” Management Accounting 65: 30–34.

Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

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

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.

Hill, Greg. 1996. “Capitalism, Coordination, and Keynes: Rejoinder to Horwitz,” Critical Review 10: 373–387.

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.

Kaplan, A. D. H., Dirlam, J. B. and Lanzillotti, R. F. 1958. Pricing in Big Business: A Case Approach. The Brookings Institution, Washington DC.

Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

Langbraaten, Nina, Nordbø, Einar W. and Fredrik Wulfsberg. 2008. “Price-setting Behaviour of Norwegian Firms – Results of a Survey,” Norges Bank Economic Bulletin 79.2: 13–34.
http://www.norges-bank.no/en/about/published/publications/economic-bulletin/economic-bulletin-22008/price-setting-behaviour-of-norwegian-firms--results-of-a-survey/

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

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.

Nakagawa, S., R. Hattori and I. Takagawa, 2000. “Price-Setting Behaviour of Japanese Companies,” Bank of Japan Research Paper
http://www.boj.or.jp/en/research/brp/ron_2000/ron0009b.htm/

Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

Park, Anna, Rayner, Vanessa and Patrick D’Arcy. 2010. “Price-Setting Behaviour – Insights from Australian Firms,” Reserve Bank of Australia Bulletin (June Quarter): 7–14.
http://www.rba.gov.au/publications/bulletin/2010/jun/bu-0610-2a.html

Parker, Miles. “Price-Setting Behaviour in New Zealand”
https://cama.crawford.anu.edu.au/amw2013/doc/Parker,Miles.pdf

Pittman, Russell. 2009. “Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms,” Economic Analysis Group Discussion Paper 09-3
http://www.justice.gov/atr/public/eag/248394.htm

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

Appendix 1
Below are the main surveys and articles in the “full cost” and marginalist pricing debate of the 1940s to 1970s

Against Marginalism
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.

Additional Studies
Alchian, A. A. 1950. “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy 58: 211–221.

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.

Rothbard’s Non-Refutation of Administered Prices

Murray Rothbard penned what at first sight looks like an interesting article here:

Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman, September 1, 39–41.
http://www.fee.org/the_freeman/detail/the-bogey-of-administered-prices#axzz2s3nbZRZX

Unfortunately, it strongly suggests that Rothbard had no proper understanding of what an administered price even is, and certainly could not refute the view that such prices are prevalent throughout modern market economies.

Rothbard’s comment here shows this:

“The point is that every seller, in a free society, whoever he is, has absolute control over the price he charges for his commodity. If I wish to set a price of $2,000 an hour for my services as a consulting economist, I am perfectly free to do so. I, the farmer, and General Motors all have this degree of control.

But this is all the control any of us have. The farmer can charge whatever he wants, but (in the free market) he cannot force anyone to buy his goods at that price. Neither can I, and neither can General Motors! All of us sellers are in the same boat. We have absolute control over the price we ask for our services, but we have no control whatever over the price the buyer is willing to pay. If we set our prices too high, people will not buy our products.

And so every producer, whatever his field, is constantly engaged in trying to discover his market, in trying to determine how much buyers are willing to pay for his product. And we each set our prices, in the real world, according to our estimates. The fact that the farmer has his market all ready and waiting for him and General Motors does not, is a purely institutional matter which in no way alters the principle. The point is that both producers can set any price they wish, but neither can compel a sale. And, therefore, either no price or all prices are ‘administered,’ depending on how you choose to define the term.”
Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman 39–41.

This implies that Rothbard thinks an “administered price” is simply one set by the seller (without any specific detail about how it is set), forced on the consumer, and possibly even at an unrealistically high level.

This is not even an accurate view of what an administered price is.

An administered price or mark-up price is as follows:

(1) a price set by businesses through their cost accounting conventions in an ex ante manner before transactions take place, on the basis of total average unit costs plus a profit mark-up, at a given, estimated, projected or target quantity of output or level of sales (from which of course the actual quantity of output produced or sold in a given time period might differ);

(2) a price that is generally inflexible with respect to demand, but tends to change – though by no means necessarily or universally – when total average unit costs change or when the business wants to change its profit mark-up;

(3) a price that is not governed by supply and demand dynamics in the usual economics sense, and which is not adjusted towards market clearing levels to create supply and demand equilibrium, and

(4) a price that is usually constrained by competition with other mark-up pricing businesses and often a price leader, and that will not be set at a level so high that it is unreasonable.

The existence of prices as above is an empirical fact with overwhelming evidence in support of it.

Rothbard’s point that if prices are “too high, people will not buy our products” is ultimately a trivial observation that has no force against administered price theory, since no administered price theorist claims that mark-up prices can be set at any level whatsoever, or that they are never constrained in some sense by competition.

Matters are no better if we turn to Rothbard’s Man, Economy, and State (Rothbard 2009: 662–664), which has a brief discussion of administered prices (apparently based on Rothbard 1959), but neither properly understands what an administered price even is nor refutes the reality that such prices are widespread.

And, finally, another libertarian attack on mark-up pricing does no better. Paul L. Poirot (1971) simply begs the questions and assumes that prices must ultimately be determined by supply and demand:

“Every selller of a commodity or service wants to cover his costs of production and receive something over and above such costs if pos­sible. He spends long hours keep­ing records and, with rare excep­tion, believes that he actually sets the price of his goods and services by adding a margin above his expenditures.

The truth, however, is that all recorded costs of an item are washed out and rendered irrele­vant by the actual market price at which that item is traded—a price determined by the competitive forces of supply and demand.”

Poirot, Paul L. 1971. “Cost-Plus Pricing,” The Freeman, January 1: 48–50
http://www.fee.org/the_freeman/detail/cost-plus-pricing#axzz2s3nbZRZX

At least Poirot acknowledges that many a business person “spends long hours keep­ing records and, with rare excep­tion, believes that he actually sets the price of his goods and services by adding a margin above his expenditures,” but Poirot’s ideology simply blinds him and renders him totally unable to accept what is actually true.

BIBLIOGRAPHY
Poirot, Paul L. 1971. “Cost-Plus Pricing,” The Freeman, January 1: 48–50
http://www.fee.org/the_freeman/detail/cost-plus-pricing#axzz2s3nbZRZX

Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman, September 1: 39–41.
http://www.fee.org/the_freeman/detail/the-bogey-of-administered-prices#axzz2s3nbZRZX

Rothbard, M. N. 2009 [1962]. Man, Economy, and State, The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

John Kenneth Galbraith on Price Controls

This fascinating passage from John Kenneth Galbraith’s A Theory of Price Control (1952) gives us a crucial insight into Galbraith’s prices controls when he worked as deputy head of the Office of Price Administration (OPA) from 1941 to 1943 during World War II:

“The next major respect in which the imperfect market assists the price-fixer arises from the tendency for prices to be inflexible and also, in some measure, institutionalized, in such markets. Where the seller has control over his prices—and ex hypothesi he has some measure of control in every imperfect market—he may for any one of a number of reasons seek to minimize the frequency of price changes. In some instances, market control, the entente between sellers itself, can be maintained only if prices are stable; the understanding may not be sufficiently complete or durable to survive too many ups-and-downs. In other cases, customers, or the Department of Justice, may have become accustomed to stable prices and may be aroused by change. Changes in prices also may be costly either in money or administrative convenience. Accordingly, profit maximization in an imperfect market may require that prices be kept constant over substantial periods; the price changes that would be required by any attempt to keep profits at a maximum at every point of time would reduce returns over a period of time.

The phenomenon of inflexible prices had been well-observed before the war, but so far as I am aware (and for good enough reasons) no one had observed that this inflexibility would facilitate wartime control. The contribution was considerable. Not only had buyers and sellers in markets characterized by rigid prices become accustomed to the level of the price, but they had also become familiar with the differentials, discounts, special deals, and all the other appurtenances of the price structure. It is much easier to continue and enforce such a settled and familiar structure than to check the upward surge of a more nearly competitive market. And in competitive markets, because differentials and discounts, like the level of prices itself, may change in day-to-day bargaining, no price schedule is as likely to conform neatly to a past structure. So, precisely at the time when sellers or market operators in such markets lose the prospect of higher prices or speculative gains, they must alter their business to conform to rules laid down in some not very engaging government prose.

For such sellers, compared with those who have been selling at infrequently changing prices, the discomforts of price control are great. The Office of Price Administration controlled the prices of all steel mill products with far less man power and trouble than was required for a far smaller dollar volume of steel scrap. Handlers of farm products complained with especial bitterness of OPA regulations, perhaps partly because it is their nature to complain, but partly because, as participants in competitive markets, their difficulties were greater. I am tempted to frame a theorem that is all too evident in this discussion: it is relatively easy to fix prices that are already fixed.

Infrequent changes in prices may best serve the long-run earnings position of a firm or industry. There is also a strong element of convention in price-making, which works on the side of infrequent change, and which does not directly serve the goal of maximum return. Traditionally (or in textbooks, at least), custom or convention has been considered an exceptional or off-type factor in price-making. The experience of modern wartime price control, I believe, would indicate its more general importance. It, too, helped the price-fixer.

The stronghold of conventional or customary pricing is in distributors’ margins, particularly in retail selling. For a large proportion of all retailers and a rather smaller proportion of all retail trade, the price charged for the service is a strictly conventional markup or ‘mark-on.’ Sometimes this is the markup suggested by the supplier; sometimes it is conventional with the store or trade for that particular class of merchandise. In either case, price control was invoked in markets in which participants had ceased to look upon price-setting as one of the exploitive or profit-making decisions on which the revenues of the business depended.” (Galbraith 1952: 15–17).

The significance of this passage is clearly that price control was relatively easy in many US markets precisely because these were markets that already had private sector price administration: that is, relatively inflexible mark-up prices that are relatively easy to calculate and infrequently changed, and, when changed, are done so because of changes in total average unit costs or the level of the profit mark-up.

In these markets, prices are not conveying information about supply and demand or performing some Hayekian informational and allocative role (Dunn 2011: 131).

When US bureaucrats like Galbraith found so much of the US economy under private price administration, as he says above, their controls were much easier to calculate and implement.

Conventional economic arguments against price control do not work in these sectors, because these sectors simply do not have the price taking behaviour required in neoclassical theory in the first place.

In his later price control theory, Galbraith argued that effective price control should be limited to the mainly oligopolistic mark-up pricing sector (Dunn 2011: 131), which is a large part of any modern capitalist economy and an important source of inflation, the worst form being wage–price spirals.


BIBLIOGRAPHY
Colander, David. 1984. “Galbraith and the Theory of Price Control,” Journal of Post Keynesian Economics 7.1: 30–42.

Dunn, Stephen P. 2011. The Economics of John Kenneth Galbraith: Introduction, Persuasion, and Rehabilitation. Cambridge University Press, Cambridge and New York.

Galbraith, John Kenneth. 1952. A Theory of Price Control. Harvard University Press, Cambridge, Mass.

Administered Prices Discredit the Austrian Economic Theories of Mises

Why? The reason is that Austrian economics – via the work of Mises – is fundamentally dependent on the idea of flexible prices and wages moving at least towards their market clearing values in a way that allegedly coordinates markets. Although Austrians do not think that economies ever actually reach an equilibrium state (such as Mises’s final state of rest) because of constant changes in the data, nevertheless the fundamental equilibrating mechanism in Misesian economics is the flexible price system:

“Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.” (Salerno 1993: 124).

But if the majority of real world prices are relatively inflexible, not properly set by supply and demand dynamics, nor set to converge to market-clearing levels, Misesian economic theory encounters insuperable difficulties, for the following reasons:

(1) there is no strong tendency to Misesian “economic coordination” by which full use of resources is achieved as product markets and labour markets are cleared, so that unused resources offered for sale are eliminated.

(2) the idea of rapid and smooth recovery from recessions/depressions will not work, if there are widespread price and wage rigidities, and firms adjust their output to demand changes.

(3) the whole Misesian argument against price controls collapses (at least in administered price markets) if a price control simply mimics an administered price already set by a private firm, allowing it a sufficient profit and allowing it continue to adjust its output to demand.

If a firm’s total average costs change, government price controls can always be reviewed and changed, when necessary.

There is no clear theoretical reason why such price controls could not work and be effective in those markets already subject to private capitalist administered prices, especially when production of the goods under price control is highly elastic (which, its turns out, many goods actually are in modern capitalist economies outside of primary sectors producing raw materials and agricultural products [Nell 1996: 108]).

(4) Mises’s argument against socialist economic calculation is also rendered highly questionable if many firms already shun his flexible price mechanism.

Even if all consumer prices and prices for factor inputs were set by costs of production plus profit mark-up by a planning board, profit and loss could still be calculated by means of administered prices. If the production system had state-owned firms with unused excess capacity and stocks and inventories, they would simply adjust output quantity to the quantity demanded by production decisions, as modern capitalist firms do.

Supply shocks in primary commodities and other crucial factor inputs could be dealt with government buffer stocks – just as in fact Western capitalist nations did in the Golden Age of Capitalism and, to some degree, even to this day (e. g., think of the US Strategic Petroleum Reserve). (Admittedly, another point is that, unless such a planned economy had persistent trade surpluses, it would probably need to retain its financial and real asset markets to attract foreign exchange to pay for trade deficits, which would require that (1) bonds or stocks and shares for some state-owned companies are still sold in a way that allows minority ownership by the private sector, (2) some private property in real assets such as real estate is allowed, and (3) the government can sell bonds to foreigners.)

Why do we have good reasons to think that such a planned economy would work, at least in an advanced industrial nation? Because so many of the elements of such a system are already used and practised in modern capitalist nations by the private sector.

So many “free markets” have long since been abolished by private businesses themselves, because they do not like the consequences of such free markets, such destructive price wars, cut throat competition, and a chaotic price system that makes profit and loss difficult to calculate or estimate.

All this is not an argument for actually adopting a planned economy, of course, but merely an exercise in showing theoretically why Mises’s socialist calculation critique is flawed and how a hypothetical system could function.

BIBLIOGRAPHY
Nell, Edward J. 1996. Making Sense of a Changing Economy: Technology, Markets, and Morals. Routledge, London and New York.

Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: 113–146.

Some More Empirical Evidence on Full Cost Pricing

The following provide some useful research, surveys and literature reviews on full cost/mark-up pricing:

Andrews, P. W. S. 1949. Manufacturing Business. Macmillan, London.

Atkin, B. and R. Skinner. 1975. How British Industry Prices. Industrial Market Research, London.

Barback, Ronald Henry. 1964. The Pricing of Manufactures. Macmillan, London.

Dorward, Neil. 1987. The Pricing Decision: Economic Theory and Business Practice. Harper & Row, London.

Gabor, André. 1985. Pricing: Principles and Practices. Gower, Aldershot.

Hague, Douglas Chalmers. 1971. Pricing in Business. Allen and Unwin, London.

Hall, Simon, Walsh, Mark and Antony Yates. 1997. “How do UK Companies set Prices?,” Bank of England Working Paper No. 67, Bank of England.

Hankinson, A. 1985. “Pricing Decisions in Small Engineering Firms,” Management Accounting 63: 36–37.

Lere, J. C. 1980. “Observable Differences Among Prime, Variable and Absorption Costing Firms,” Journal of Business Research 8.3: 371–387.

Mills, R. W. and Sweeting, C. 1988. Pricing Decisions in Practice: How are they Made in UK Manufacturing and Services Companies?. The Chartered Institute of Management Accountants, London.

Scapens, R. W., Gameil, M. Y. and Cooper, D. J. 1983. “Accounting Information for Pricing Decisions,” in J. Arnold, R. W. Scapens, M. Y. Gameil, and D. J. Cooper (eds.), Management Accounting Research and Practice. CIMA, London. 283–306.

Skinner, R. C. 1970. “The Determination of Selling Prices,” The Journal of Industrial Economics 18.3: 201–217.

Reality Refutes Mises on Costs and Prices

In a passage that should simply provoke hilarity to any person knowledgeable about real world prices, Mises shows us how far his economic theory is from reality:

“Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, that is, demand and supply. Whatever the market situation which generated this price may be, with regard to it the price is always adequate, genuine, and real. It cannot be higher if no bidder ready to offer a higher price turns up, and it cannot be lower if no seller ready to deliver at a lower price turns up. Only the appearance of such people ready to buy or to sell can alter prices.

Economics analyzes the market process which generates commodity prices, wage rates, and interest rates. It does not develop formulas which would enable anybody to compute a ‘correct’ price different from that established on the market by the interaction of buyers and sellers.

At the bottom of many efforts to determine nonmarket prices is the confused and contradictory notion of real costs. If costs were a real thing, i.e., a quantity independent of personal value judgments and objectively discernible and measurable, it would be possible for a disinterested arbiter to determine their height and thus the correct price. There is no need to dwell any longer on the absurdity of this idea. Costs are a phenomenon of valuation. Costs are the value attached to the most valuable want-satisfaction which remains unsatisfied because the means required for its satisfaction are employed for that want-satisfaction the cost of which we are dealing with. The attainment of an excess of the value of the product over the costs, a profit, is the goal of every production effort. Profit is the pay-off of successful action. It cannot be defined without reference to valuation. It is a phenomenon of valuation and has no direct relation to physical and other phenomena of the external world.

Economic analysis cannot help reducing all items of cost to value judgments. The socialists and interventionists call entrepreneurial profit, interest on capital, and rent of land ‘unearned’ because they consider that only the toil and trouble of the worker is real and worthy of being rewarded. However, reality does not reward toil and trouble. If toil and trouble is expended according to well-conceived plans, its outcome increases the means available for want-satisfaction. Whatever some people may consider as just and fair, the only relevant question is always the same. What alone matters is which system of social organization is better suited to attain those ends for which people are ready to expend toil and trouble. The question is: market economy, or socialism? There is no third solution. The notion of a market economy with nonmarket prices is absurd. The very idea of cost prices is unrealizable. Even if the cost price formula is applied only to entrepreneurial profits, it paralyzes the market. If commodities and services are to be sold below the price the market would have determined for them, supply always lags behind demand. Then the market can neither determine what should or should not be produced, nor to whom the commodities and services should go. Chaos results.” (Mises 2008: 393).

Let us look through the litany of errors in this passage:

(1) Mises says that:

“Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, that is, demand and supply.”

The word “necessary” in this sentence should raise eyebrows. And what type of “market” is Mises speaking of?

Is Mises referring to (1) real world markets or (2) imaginary, hypothetical markets that exist only in his head and where his “necessary outgrowth of the interplay of the forces … [sc. of] demand and supply” hold true? If the latter, then his analysis is irrelevant to reality, since the real world obviously departs from Mises’s ideal.

If Mises refers to the real world, then he is straightforwardly wrong.

To see this, we need only review what Mises means by “the interplay of the forces … [sc. of] demand and supply.” This is quite clear from the rest of his writings, such as the following:

(1) “The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.” (Mises 2008: 756–757).

(2) “It is ultimately always the subjective value judgments of individuals that determine the formation of prices …. . Market prices are entirely determined by the value judgments of men as they really act.

If one says that prices tend toward a point at which total demand is equal to total supply, one resorts to another mode of expressing the same concatenation of phenomena. Demand and supply are the outcome of the conduct of those buying and selling. If, other things being equal, supply increases, prices must drop. At the previous price all those ready to pay this price could buy the quantity they wanted to buy. If the supply increases, they must buy larger quantities or other people who did not buy before must become interested in buying. This can only be attained at a lower price.

It is possible to visualize this interaction by drawing two curves, the demand curve and the supply curve, whose intersection shows the price.” (Mises 2008: 329–330).

(3) “The market interaction brings about a price at which demand and supply tend to coincide. The number of potential buyers willing to pay the market price is large enough for the whole market supply to be sold. If government lowers the price below that which the unhampered market would set, the same quantity of goods faces a greater number of potential buyers who are willing to pay the lower official price. Supply and demand no longer coincide; demand exceeds supply, and the market mechanism, which tends to bring supply and demand together through changes in price, no longer functions.” (Mises 2011: 101).

(4) “Competitive prices are the outcome of a complete adjustment of the sellers to the demand of the consumers. Under the competitive price the whole supply available is sold, and the specific factors of production are employed to the extent permitted by the prices of the nonspecific complementary factors. No part of a supply available is permanently withheld from the market, and the marginal unit of specific factors of production employed does not yield any net proceed. The whole economic process is conducted for the benefit of the consumers.” (Mises 2008: 354).

So real world prices must be determined by the “interplay of the forces ... [sc. of] demand and supply” in this sense. (That is, Mises is not simply using “demand and supply” in a weak and trivial sense of saying that a good must be demanded and valued by a consumer as a precondition of him buying it and physically supplied for him to do so.)

But real world capitalist economies have many prices – and in many cases a majority of prices – that are set by price administration. Such “administered prices” (or mark-up prices, average-cost prices, full-cost prices, normal cost prices, or cost-plus prices) are set by businesses based on average costs of production per unit plus a profit mark-up. For the empirical evidence on this, see the links in Appendix 1 below.

Administered prices (or mark-up prices) are not set by the conventional forces of supply and demand. They are not even intended to be market-clearing prices. They remain relatively inflexible with respect to demand, especially downward. Often they will not be changed for up to a year. When costs do rise, they might change or they might not: even price rises need not necessarily happen if businesses feel their competitors will not raise prices.

Such mark-up prices can be found in both consumer goods markets and intermediate goods and wholesale markets (Parker, pp. 6–7).

In short, these are prices that do not confirm to Mises’s strident statement about how prices are determined. And the empirical evidence shows that they normally account for the majority of business prices in most first world nations.

(2) Mises states that

“At the bottom of many efforts to determine nonmarket prices is the confused and contradictory notion of real costs. If costs were a real thing, i.e., a quantity independent of personal value judgments and objectively discernible and measurable, it would be possible for a disinterested arbiter to determine their height and thus the correct price.”

According to Mises, the notion of “real costs” is “confused and contradictory.” But it seems that Mises is inventing a straw man.

Even though any given costs as measured in money prices might well be related in some sense to subjective personal value judgments, it is still the case that money prices are an objective phenomenon that are “discernible and measurable.” If two people see the price of a good displayed, they might well disagree profoundly about why or if they subjectively value it, but they cannot disagree about the stated money price, without one of them being wrong or both being wrong. The money price is an objective thing in this sense.

Moreover, Mises’s statements here seem to contradict what he says elsewhere.

For example, Mises says that “[e]conomic calculation always deals with prices, never with values” (Mises 2008: 332). Prices are always money prices, and effective calculation of profit and loss via costs occurs via money prices:

“Prices are always money prices, and costs cannot be taken into account in economic calculation if not expressed in terms of money.” (Mises 2008: 349).

But that requires that money prices have a type of objectivity.

(3) Finally, we get this gem:

“The question is: market economy, or socialism? There is no third solution. The notion of a market economy with nonmarket prices is absurd. The very idea of cost prices is unrealizable. Even if the cost price formula is applied only to entrepreneurial profits, it paralyzes the market. If commodities and services are to be sold below the price the market would have determined for them, supply always lags behind demand. Then the market can neither determine what should or should not be produced, nor to whom the commodities and services should go. Chaos results.”

The idea of “cost prices” is definitely not “unrealizable.”

Such “cost prices” – prices based on total average unit costs plus profit mark-up – have long existed throughout the capitalist world. The existence of widespread administered prices has been documented since the 1920s.

It follows from Mises’s analysis that all advanced capitalist economies from at least the 1920s onwards should be in a permanent state of “chaos”: for in most of them probably the majority of prices are relatively inflexible, not properly set by supply and demand, nor set to converge to market-clearing levels.

According to Mises, we should have “chaos” where “supply always lags behind demand” in these markets.

But we do not have chaos, nor do we see such chronic supply problems in capitalist nations.

Mises is contemptibly ignorant of real world capitalism: a world where most firms set their mark-up price based on average unit money costs of production, and then adjust production to match demand, while keeping inventories and significant unused capacity at factories and plants available to meet increases in demand. When demand falls, businesses fire workers and cut production.

Businesses generally determine what to produce via demand and quantity signals.

Mises – and modern Austrians – are guilty of fantasy world economics.


APPENDIX 1
“Two Marketing Studies on US Administered Prices,” November 16, 2013.
This cites two marketing surveys that found that from the 1980s to the 1990s mark-up pricing accounted for roughly 70% to 85% of US industrial prices.

“Administered Prices in the Eurozone: Some Empirical Data,” October 16, 2013.
This cites the wide-ranging survey of Fabiani et al. (2006) on prices in the Eurozone. The average for mark-pricing throughout the Eurozone is 54%.

“Administered Pricing in the United Kingdom,” October 19, 2013.
This cites a survey from the UK that found that cost-based pricing with variable mark-ups accounted for 58% of firms surveyed.

“Mark-up Pricing in Norway,” November 23, 2013.
This cites a survey of 725 Norwegian firms that found that 69% of Norwegian businesses use mark-up pricing.

“Mark-up Pricing in Ireland,” November 22, 2013.
This cites a survey of 1000 Irish firms and finds that the largest type of pricing is mark-up pricing at 44% of firms. Other evidence suggests that the real percentage is higher than this.

“Mark-up Prices in Iceland,” November 25, 2013.
This cites a survey of 580 Icelandic firms and finds that mark-up pricing is the largest type of pricing at 45%. Evidence suggests that more mark-up prices are concealed in the other categories in the survey, so that real percentage is higher than this.

“Mark-up Pricing in Japan,” November 29, 2013.
This cites a survey of 630 Japanese companies. As interpreted by Fabiani et al. (2007: 190), the data suggests that least 54% of Japanese firms use mark-up pricing.

“Mark-up Pricing in New Zealand,” November 30, 2013.
This cites a survey of 5,300 New Zealand firms that finds that mark-up prices account for about 54% of business prices.

“Mark-up Pricing in Australia,” November 30, 2013.
This cites a survey of around 700 Australian firms that finds that mark-up prices account for at least 49% of firm prices. Once we add likely mark-up prices concealed in the other categories in the survey, the percentage possibly rises to 60%.

“Downwards Rigidity of Prices and Mark-up Pricing,” November 22, 2013.

“Lee on Post Keynesian Price Theory in The Oxford Handbook of Post-Keynesian Economics,” October 15, 2013.


BIBLIOGRAPHY
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Mises, L. von. 2011. A Critique of Interventionism. Mises Institute, Auburn, Ala.

Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Parker, Miles. “Price-Setting Behaviour in New Zealand”
https://cama.crawford.anu.edu.au/amw2013/doc/Parker,Miles.pdf

Mark-up Pricing in Ireland

Keeney, Lawless and Murphy (2010) provide empirical evidence on the price setting behaviour of one thousand Irish firms in a survey in which firms were directly asked how they set prices (Keeney, Lawless and Murphy 2010: 3).

The result was that 44% of firms reported that their prices were set based on costs and a self-determined profit margin (Keeney, Lawless and Murphy 2010: 3).

Although this was the largest and most prevalent category of price setting reported in their data and is certainly significant, nevertheless it looks rather low compared to other nations.

But an examination of the other findings strongly suggests that Keeney, Lawless and Murphy’s other categories conceal mark-up prices too:

(1) No autonomous price setting* | 11.1%
(2) Price set by customer(s) | 5.5%
(3) Price set following main competitors | 33.3%
(4) Price based on costs and self-determined profit margin | 44.2%
(5) Other | 5.9%

* Because “the price is regulated, or it is set by a parent company/group” (Keeney, Lawless and Murphy 2010: 6).

Category (1) would appear to be a strong candidate for some extra mark-up pricing firms whose price is set by their parent company (in addition to regulated price companies which are also present there), and even category (3) is not inconsistent with some more mark-up firms whose administered price is based on price leaders in their respective markets who set the price. Although (3) no doubt also has a number of flexprice firms too, the point remains that some of the firms there could really belong to category (4).

This seems to be confirmed later in the data when firms were asked to assess how likely it was that they would adjust prices downwards in response to a negative demand shock.

What was discovered is that a majority of firms said that negative demand shocks were of little or no relevance to pricing decisions! The data can be seen here:

(1) Manufacturing | 69.1%
(2) Construction | 77.6%
(3) Distribution | 58.6%
(4) Other Services | 69.1%
(5) Total | 66.5%
(Keeney, Lawless and Murphy 2010: 6).

It seems incredible that so many firms could report this if only 44.2% were using mark-up pricing, since mark-up pricing firms are precisely the ones for whom demand is relatively unimportant.

More likely, the number of Irish mark-up firms is much higher than the direct number reported, and, as argued above, categories (1) and category (3) conceal a number of additional mark-up firms.

I think this is consistent with similar conclusions that can be made about UK price setting data.


BIBLIOGRAPHY
Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

Two Marketing Studies on US Administered Prices

Two useful studies from accounting and marketing research – as opposed to economics – provide interesting empirical data on “full cost” pricing, a type of administered price, in the US:

Govindarajan, V. and R. Anthony. 1986. “How Firms use Cost Data in Price Decisions,” Management Accounting 65: 30–34.

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

Govindarajan and Anthony (1986) conducted a survey in which over 500 US industrial companies answered a questionnaire on how they set prices. They found that 85% of companies surveyed used full cost pricing (Govindarajan and Anthony 1986: 31), and, in contrast to conventional marginalist theory, most businesses certainly do take account of fixed and allocated costs: therefore “sunk costs” are important in determining the administered price.

Govindarajan and Anthony also found that relatively few business managers could estimate the demand curve for their product: that is, an estimate of the quantity that would be demanded at a particular price (Govindarajan and Anthony 1986: 32).

Shim and Sudit (1995: 37) – the next study – conducted a survey in 1993 of US industrial companies, and found that 69.5% used full cost pricing.

Both surveys, then, suggest that from the 1980s to the 1990s full cost pricing accounted for roughly 70% to 85% of US industrial prices.

These findings have shocked neoclassical economists, who resort to special pleading to explain such price setting away as a kind of “irrational” behaviour by managers and firms (e.g., Al-Najjar, Baliga, and Besanko 2008).

BIBLIOGRAPHY
Al-Najjar, Nabil, Baliga, Sandeep and David Besanko. 2008. “Market Forces meet Behavioral Biases: Cost Misallocation and Irrational Pricing,” The RAND Journal of Economics 39.1: 214–237.

Govindarajan, V. and R. Anthony. 1986. “How Firms use Cost Data in Price Decisions,” Management Accounting 65: 30–34.

Pittman, Russell. 2009. “Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms,” Economic Analysis Group Discussion Paper 09-3
http://www.justice.gov/atr/public/eag/248394.htm

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.