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.