PRICING

Summary

Pricing in mainstream economics seems to be a rather simple endeavor. Post Keynesians view pricing as a much more complex decision process: even if firms would like to maximize profits, they only have approximate information about demand schedules: knowledge about purchasers is costly to obtain and always uncertain; firms operate in a world of monopolistic competition and oligopolies; the environment is one of inter-dependencies where rivals, actual or potential, may change their past behavior and endorse new strategies. In this complex world, business executives need to adopt simple rules, based on data that are readily accessible, and which will allow these executives to monitor financial results. Cost-plus pricing is one of these rules. Cost-plus pricing means that firms fix prices on the basis of some measure of unit costs, rather than as a reaction to demand fluctuations.

Following a distinction made by Alfred Eichner (1987: 338), Post Keynesian authors like to distinguish pricing theories from price theories. A theory of prices is a theory that ascertains the price of a product relative to other prices. It is an economy-wide theory of relative prices. It yields an equilibrium configuration of prices, which would occur if all adjustments and various time lags could be dispensed with. More recent work in price theory has dealt with the issue of dynamic stability: are there mechanisms, everything else being constant, that would drive actual prices towards the equilibrium configuration? On the other hand, a pricing theory is a statement about the behavior of price-making agents. It discusses how price decisions are actually taken; it deals with the process of price setting; it might also make explicit the information basis upon which the pricing decisions are taken. There may be several Post Keynesian theories of prices, but all these theories are based on the same pricing theory — the cost-plus pricing approach. What are the ultimate determinants of pricing is another issue upon which there is less agreement.