Understanding How Price Responds to Costs and Production (original) (raw)

Price and Profit: Investigating a Conundrum

Review of Agricultural Economics, 2008

Although few in number, studies consistently find that price explains little, if any, of the variation in profit across farms. This contrasts with farmers' opinions regarding the importance of price, as well as the use of price supports as a primary policy instrument. Using farm level data from the Illinois Farm Business Farm Management program for calendar years 1996 through 2004, a potential explanation for this conundrum is identified. Price is significantly more correlated with a farmer's variation in management return from year to year (approximately, +0.45) than with the variation in management return across farmers (approximately, +0.10). Thus, the conundrum arises out of different perspectives: farmers focus on the performance of their own farm over time while studies have focused on the variation among farms.

Beyond the Cost of Price Adjustment: Investments in Pricing Capital

SSRN Electronic Journal, 2002

The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms' price-setting activities as "producing" prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these "pricing" production processes. We coin the term "pricing capital" for these investments, and suggest that they can improve the efficiency of the "pricing production" activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level "pricing capital" has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the "pricing capital" to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, "pricing capital" introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital.

Pricing Behaviour in South African Manufacturing Industry: 1945-82

The South African Journal of Economics, 1992

  1. RECENT DEBATE concerning future economic policy for South Africa has proved the need for a coherent strategy toward the manufacturing sector. Discussion surrounding inward industalisation, the limited possibilities of import substitution, and the problems associated with export drives have all highlighted the need. This paper attempts to establish one of the characteristics of the South African manufacturing sector, in order to be of some assistance in this regard. In particular, it is pricing behaviour in manufacturing industry which is examined, taking theoretical and econometric work on developed industrialised nations as a starting point. Interest in the pricing decision stems from both theoretical and policy perspectives. The pricing decision has lain at the heart of the debate sur-rounding the nature of decision-making in the firm. Those economists emphasising market forces, have understood price to be determined largely by the demand curve the firm happens to be facing. On the other hand, economists emphasising the degree of discretion management has in pursuing its own objectives, or the fact that firms frequently have to make decisions with imperfect information, have understood pricing decisions as the outcome of an application of various rules of thumb. Most frequently cited of the latter are rules which specify a mark-up on cost of production. The investigation in this paper throws some light on which of these positions South African data on the manufacturing industry favours. A further significance of the results presented is that they carry some implications for anti-inflationary policy in South Africa: since data for the South African manufacturing industry support the mark-up pricing model, inflationary pressures in the industrial sector appear to have been of a cost-push rather than a demand-pull nature. In examining pricing behaviour, this paper ditinguishes between the excess demand and the mark-up pricing models. Marginal price theory requires 1992 SAJE v60 that output -and hence price -be set such that marginal revenue equal marginal cost. In short, price is hypothesized to be directly sensitive to fluctuations in demand via the marginal revenue schedule. Thus the excess demand model claims that a sectoral index of demand should explain changes in the price level without the assistance of cost variables (McCallum, 1970:151). In the long run, under competitive conditions, price would equal marginal cost, where the latter include normal profits to the entrepreneur. This approach was challenged by . Since then, at least some of those economists who lay emphasis on the uncertainty facing firms, or the cost of information, stress that firms may not be in a position to know their marginal revenue schedules, and under certain circumstances may be uncertain of their marginal cost schedules also. Since profit maximizing prices are not held to be determinable, such dissenters have suggested that pricing behaviour follows a fixed mark-up on unit cost of production. While it is accepted that demand may well have some impact on price, the impact is understood to be indirect, via long-term non-cyclical structural factors which affect the cost structure of manufacturing industry, rather than directly via the marginal revenue schedule. The variable costs of relevance to testing the mark-up pricing model, are thus normalised variable costs (purged of all cyclical content). (See Coutts, Godley and Nordhaus 1978 for further expositions of the mark-up pricing model. For comments and critiques, see De

Price: an introduction

Distinktion: Journal of Social Theory

This special issue is concerned with price and pricing. It seeks to locate price as a critical socio-theoretical concern and as a socio-theoretical problem. This is by no means the first time price has been located in such terms. Marx located the question and problem of price as fundamental to the analysis capitalism (not least the question or problem of the transformation of the value of commodities into prices); while Simmel took issue with the conflation of price and value that he saw in the work of economists and opened the relations between price and value out to critical investigation. Both Marx and Simmel, then, understood that price was more than a simple or direct expression of economic value and located price and processes of pricing as serious objects of socio-theoretical study.

Measuring the Effects of Price Environment: An Application to U.S. Industries

Revue d'économie politique, 2019

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