How Do Firms Really Choose Prices?

An interesting study here. An excerpt:
The economics profession has remained mostly unpersuaded. A recent paper by Al-Najjar, Baliga, and Besanko (2008, hereinafter ABB) continues the long tradition of economists examining the pricing practices of firms and finding them wanting. ABB note that economic theory "offers the unambiguous prescription that only marginal cost is relevant for profit-maximizing pricing decisions" and contrast this with the findings of survey researchers such as Hall and Hitch and with statements in textbooks of managerial and cost accounting that "overwhelmingly, companies around the globe use full costs rather than variable costs" to set prices – i.e. they mistakenly "treat fixed and sunk costs as relevant for pricing decisions."

1 comment:

  1. Nice post.

    I think this is one important key to understanding how real world capitalist economies really work.

    Once one recognises the overwhelming evidence for fixprice markets (cost of production plus profit markup) and what Kaldor called "quantity signals", then even if you are highly skeptical of Keynesian economics, at least one can understand how Keynesians think.

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