Price Behaviour and Business Behaviour

Ni zan, Jona han Wo king Pape P ice Beha iou and Business Beha iou Discussion Pape s, Depa men o Economics, McGill Uni e si y P o ided in Coope a ion wi h: The Bichle & Ni zan A chi es Sugges ed Ci a ion: Ni zan, Jona han (1990) : P ice Beha iou and Business Beha iou , Discussion Pape s, Depa men o Economics, McGill Uni e si y, The Bichle and Ni zan A chi es, To on o, h p://bna chi es.yo ku.ca/160/ This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/157851 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h p://c ea i ecommons.o g/licenses/by-nc-nd/4.0/ Depa men o Economics Discussion Pape 1990 PRICE BEHAVIOUR AND BUSINESS BEHAVIOUR Jona han Ni zan This pape is a d a o wo k in p og ess Depa men o Economics McGill Uni e si y 855 She b ooke S . Wes Mon eal, Quebec H3A 2T7 Con en s Abs ac 1 In oduc ion 2 1. The Adminis e ed P ice Con o e sy: Beginnings 4 2. P ice Flexibili y: Fac o Fancy? 8 3. ‘Full-Cos ’ P icing 14 4. The Ma ginalis s’ Coun e a ack 18 5. The ‘Ta ge ’ Ra e o Re u n 24 6. The An h opology o Business Beha iou : An In e p e a ion 29 Re e ences 31 Abs ac The p esen essay is he second in a se ies o h ee pape s which examine al e na i e app oaches o in la ion. He e we iden i y some o he p incipal c i icisms exp essed agains neoclassical iews on p ice beha iou and business beha iou . These challenges g ew om he ea ly disco e y o ‘adminis e ed p ices’ by Means and he subsequen indings by Hall and Hi ch ega ding ‘ ull-cos ’ p icing. The no ions ha indus ial p ices we e ela i ely in lexible and ha businessmen se hose p ices by imp ecise ules-o - humb s ood in sha p con as o he p is ine simplici y o neoclassical models. Ye hese a emp s o g ea e ealism seemed o unde mine he p ospec s o cons uc ing a cohe en heo y o p ices. 1 In oduc ion The economic and poli ical u bulence o he 1930s spawned a numbe o se ious challenges o he hegemony o classical economic doc ines. O hese challenges, only Keynes’ ‘new economics’ was b oadly accep ed and assimila ed in o he mains eam o economic hinking. Keynes was success ul pa ly because his policy p oposi ions sough o e o m capi alism while p ese ing i s unde lying s uc u e. Acco ding o Keynes, he mal unc ioning o he sys em s emmed p ima ily om a ch onic lack o synch oniza ion be ween he ‘p opensi ies’ o consume s and he ‘animal spi i s’ o in es o s. The ul ima e p oblem was oo ed no in he s uc u e o capi alism bu in undamen al psychological endencies s emming om human na u e i sel .1 In his con ex , his call o go e nmen in e en ion appea ed o be ai ly conse a i e: policies we e needed no o al e basic powe ela ionships among speci ic economic g oups bu me ely o o e come an un o una e gap be ween abs ac sa ing and in es men ‘ endencies.’ As an o hodox s uden o Ma shall, Keynes a ely ques ioned he basic s uc u al ene s o neoclassical mic oeconomics and, indeed, he saw no appa en eason o do so. In his opinion, he mac oeconomic p oblem o unemploymen a ose despi e he e iciency o indi idual ma ke s and, u he mo e, he solu ion o he p oblem could be achie ed by b oad policy measu es which need no in e e e wi h he unc ioning o hese indi idual ma ke s.2 The appa en success o ea ly Keynesian policies du ing and a e he Second Wo ld Wa u he s eng hened he con ic ion ha mac oeconomics was qui e independen o unde lying mic oeconomic s uc u es. This legacy o Keynesian mac oeconomics has p o en mo e powe ul hen Keynesian heo y i sel , o while he p imacy o Keynesianism has been subsequen ly challenged by compe ing schools, mac oeconomics as a whole con inues o neglec signi ican aspec s o eal s uc u es and ins i u ions. The e en ual di o ce o mains eam mac oeconomics om he dynamics o eal economic s uc u e was es ablished only in he pos -wa e a, howe e . Du ing he 1930s, be o e he appa en iumph o Keynesian policies, economis s we e seeking answe s also in al e na i e di ec ions. While Keynes was elabo a ing he psychological easoning o his Gene al Theo y, some o his con empo a ies we e ying o iden i y s uc u al causes o he gene al economic dis ess. Thei subjec o 1 See o example Keynes (1936), p. 97 and p. 161. Keynes was o cou se e y much awa e o con empo a y s uc u es and ins i u ions bu hese we e signi ican o his Gene al Theo y only in so a as hey enhanced he endency o s agna ion o ins abili y. The p ima y cause o hese endencies emained human na u e. 2 Being awa e o con empo a y esea ch, Keynes (1936, pp. 268, 270-1) was ca e ul o s ess ha his heo y abs ac ed om ‘adminis e ed’ o ‘monopoly’ p ices. Hal a cen u y la e , Tobin (1983, p. 299) exp essed e oac i e eg e o his u n o e en s: ‘I is un o una e ha Keynes, in spi e o he Chambe lin-Robinson e olu ion ha was occu ing in mic oeconomics a he same ime he was making his mac o e olu ion, chose o challenge o hodoxy on i s own mic oeconomic g ounds o compe i i e ma ke s.’ 2 inqui y conce ned basic con ic ions abou ‘p ice beha iou ’ and ‘business beha iou .’ Fi s , he pionee ing wo k by Means (1935a) and by he Na ional Resou ces Commi ee (1939) unde his di ec ion ques ioned he monoli hic app oach o p ice dynamics. Means sugges ed ha he e we e in ac wo ypes o p ices – hose which we e ela i ely lexible and hose which we e ela i ely in lexible. Mo e impo an ly, he a gued ha his basic di e ence was oo ed in he s uc u e o mode n capi alism. Second, he esea ch by Hall and Hi ch (1939) challenged accep ed assump ions ega ding p icing decisions by i ms. Thei in e iews wi h businessmen indica ed ha he la e de e mined hei p ices by imp ecise ules-o - humb and we e qui e indi e en o he no ion o ‘p o i maximiza ion.’ These s udies launched a p olonged con o e sy which has no ye been ‘ esol ed’ and, because i in ol es basic me hodological issues, pe haps could no be esol ed. The pu pose o his essay is no o p o ide a e iew o his li e a u e bu a he o examine key me hodological ques ions a ising om i . Gi en ou limi ed goal and he a ailabili y o nume ous su eys, we ind i app op ia e o ocus only on some o he impo an con ibu ions o he deba e. B ie ly, he link be ween ‘p ice beha iou ’ and ‘business beha iou ’ in ol es ques ions o ‘s uc u e’ and economic o business ‘powe .’ The neoclassical no ion o ‘p icing powe ’ sugges ed ha a i m could se i s own p ice bu , since he i m was assumed o maximize p o i , economis s could s ill ‘de e mine’ wha ha p ice would be. The inc easing emphasis since he 1930s on he signi icance o oligopolis ic in e dependency did no p o e o be de imen al o p ice heo y. Wi h su icien ly es ic i e assump ions and a complica ed ma hema ical easoning, economis s o en succeeded in inding an ‘op imal solu ion’ o hei game heo y. The li e a u e ollowing Means and Hall and Hi ch unde mined his logical simplici y. The exis ence o ela i e p ice in lexibili y in ma ke s o he han pu e compe i ion did no imply ha such p ices we e ‘op imal’ o i ms. I only sugges ed ha p ices we e ‘adminis e ed’ and his was p ecisely he p oblem. I hese we e ‘monopoly p ices’ in he neoclassical sense hey should ha e been pe haps highe han compa able compe i i e p ices, bu he e was no eason o expec hem o be less lexible. The ac ha adminis e ed p ices we e ela i ely in lexible implied ha i ms migh no ha e been ac ing ‘op imally.’ The w i ings on business beha iou s eng hened his doub when hey poin ed o subs an ial ambigui ies and conside able disc e ion in he way i ms se hei p icing policies. I onically, by emphasizing he signi icance o s uc u e o ac ual p icing, he new empi ical li e a u e ope a ed o unde mine he me hodological basis o p ice heo y i sel . I was implied ha i ms ope a ing in non-pe ec ly compe i i e ma ke s had he p i ilege no only o de e mine hei own p ices, bu also o se hese p ices in a a he ‘a bi a y’ manne . P ices we e s ill in luenced by ‘objec i e’ condi ions such as cos , demand, he speci ic s uc u e o he indus y, o he in ensi y o compe i ion. Howe e , since i ms enjoyed subs an ial disc e ion o e hei own goals, he ‘mapping’ o hese objec i e condi ions in o p ices was obscu ed om he economis . 3 Ob iously, hese issues ha e conside able bea ing on ‘s uc u al’ heo ies o in la ion which we explo e in an accompanying pape (Ni zan, 1990). The i s and second sec ions o his pape deal wi h he ea ly con ibu ions o he adminis e ed-p ice con o e sy and he c i icisms hey elici ed. The hi d sec ion explo es he ea ly li e a u e on ‘ ull-cos ’ p icing while, in he ou h sec ion, we deal wi h he ma ginalis s’ coun e a acks agains ha li e a u e. The i h sec ion examines he aspec s conce ning he ‘ a ge ’ a e o e u n and he las sec ion o e s some obse a ions on he an h opology o business beha iou . 1. The Adminis e ed P ice Con o e sy: Beginnings The con o e sy o e he ela ionship be ween ma ke s uc u e and p ice beha iou was igge ed in 1935 by he wo k o Means on Indus ial P ices and Thei Rela i e In lexibili y.3 Means aised wo basic ques ions conce ning (1) he appa en anomaly in he beha iou o nume ous indus ial p ices, and (2) he causes behind his beha iou . Fi s , he a gued ha comp ehensi e p ice indices, such as he Wholesale P ice Index published by he Bu eau o Labo S a is ics (BLS), we e po en ially misleading because hey ailed o dis inguish be ween ‘ma ke p ices’ and ‘adminis e ed p ices.’ Ma ke p ices we e de ined as p ices which we e ‘made in he ma ke as a esul o he in e ac ion o buye s and selle s.’ Adminis e ed p ices, in con as , we e ‘se by adminis a i e ac ion and held cons an o a pe iod o ime’ while sales luc ua ed wi h demand a he igid p ice (Means, 1935b, p. 401). This dis inc ion was highly signi ican because ma ke and adminis e ed p ices ‘beha ed’ qui e di e en ly in e ms o bo h equency and ampli ude o change. The e idence o such di e gen beha iou was based on an analysis o mon hly p ices o indi idual commodi ies included in he BLS Wholesale P ice Index. Means classi ied 747 such i ems acco ding o he numbe o imes hei p ice changed du ing he eigh -yea pe iod be ween 1926 and 1933 and demons a ed ha p ices o he majo i y o i ems changed ei he e y equen ly o e y in equen ly.4 His in e ence ha hese we e in ac ‘qui e di e en ypes o p ices’ was u he enhanced by illus a ing ha ‘i ems which changed equen ly in p ice showed a la ge d op 3 Al hough he ini ia ed he deba e, Means was no he i s o d aw a en ion o p ice in lexibili y and o discuss i s po en ial causes. S igle and Kindahl (1970, pp. 11-12) ci ed ea lie wo ks by Be lund and by Jones on he igidi y o s eel p ices du ing he ea ly 20 h cen u y. In 1927, Mills published a comp ehensi e s udy on The Beha io o P ices whe e he ound, much like Means’ la e disco e y, ha indus ial p ices appea ed o be ei he lexible o in lexible in hei equency o change. Ano he s udy by Tin e (1935) on p ice beha iou in Ge many, England and he Uni ed S a es, sugges ed ha he equency o p ice changes in monopolized indus ies was app eciably smalle han in compe i i e ones. 4 O he 747 i em p ices, 50 pe cen changed e y in equen ly (be ween 0 and 24 p ice changes du ing a pe iod o 96 mon hs), 24 pe cen changed e y equen ly (be ween 80 and 94 imes), while 26 pe cen ell in he in e media e ange (be ween 25 and 79 imes o e he pe iod). See Means (1935b) Cha I, p. 402. 4 du ing he dep ession while hose ha ing a low equency o change ended o d op li le in p ice’ (Means, 1935b, p. 402 and p. 403). Addi ional e idence published 4 yea s la e by he Na ional Resou ces Commi ee unde he di ec ion o Means indica ed ha , as p ices eco e ed be ween 1933 and 1937, equency and ampli ude o p ice changes we e again posi i ely ela ed. W i ing du ing he dep ession o he 1930s, Means was p ima ily a en i e o he b oad economic implica ions o his dis inc ion be ween ma ke and adminis e ed p ices. Based on he obse a ion ha a subs an ial numbe o commodi ies (o e one hal ) had adminis e ed p ices, he a gued ha ela i e p ice in lexibili y became a majo dis up i e ac o in he Ame ican economy: We ha e always elied in he pas on he au oma ic balancing o economic ac i i y h ough p ice changes. This is all igh whe e p ices a e lexible, since a gene al d op in demand such as occu ed in he dep ession would esul in a d op o p ices and main ained p oduc ion. I all p ices had been lexible i is doub ul i we would ha e had a se ious dep ession a e he s ock c ash o 1929. Whe e p ices a e igid, howe e , a gene al d op in demand has qui e di e en and mos disas ous esul . Ins ead o p oducing lowe p ices, he d op in demand p oduces a d op in sales and in p oduc ion. Wo ke s ha e less o spend, hus ampli ying he o iginal d op in demand. In his manne , igid p ices can expand an ini ial small luc ua ion o indus ial ac i i y in o a ca aclysmic dep ession. (1935b, p. 405) Means wen on o illus a e ha be ween 1929 and he sp ing o 1933 he e was a ma ked in e se ela ionship be ween he ela i e d op in p ices and he ela i e decline in p oduc ion o a sample o en majo indus ies. When p ices ell subs an ially, like in he case o ag icul u al commodi ies o pe oleum o example, he decline in ou pu was below 20 pe cen , while when p ices emained s ubbo nly igid like in ag icul u al implemen s o mo o ehicles, p oduc ion le els d opped by as much as 80 pe cen ! Gi en he p e alence o adminis e ed p ices and gi en he dis up i e e ec hei ela i e in lexibili y had on mac oeconomic pe o mance, Means se o add ess he second issue, namely he cause behind he phenomenon. In his opinion, adminis e ed p ices eme ged p ima ily ( hough no exclusi ely) as a consequence o indus ial concen a ion. Al hough he exp essed his con ic ion o ce ully al eady in 1935, empi ical suppo o his ‘concen a ion hesis’ was i s p o ided only in he Na ional Resou ces Commi ee monog aph published in 1939. The e Means examined p ice changes be ween 1929 and 1932 o a subse o 37 ou o he 282 manu ac u ing indus ies included in he Census’ uni e se, and con as ed hem wi h ou -en e p ise concen a ion a ios associa ed wi h each indi idual indus y. In selec ing he sample, Means sough o elimina e he possible in luence ac o s o he han concen a ion migh ha e had on p ice changes. Consequen ly, he excluded 5 indus ies whe e (1) p oduc s we e no ela i ely homogenous, (2) mo e han 2/3 ds o he p oduc alue o igina ed ou side o manu ac u ing, possibly in demand-sensi i e indus ies such as ag icul u e o some aw ma e ials, (3) p oduc s we e no p oduced o na ional o in e na ional ma ke s, so na ional concen a ion a ios we e misleading, and (4) easonably eliable p ice da a we e no a ailable. Based on a sca e diag am be ween pe cen change in p ice and concen a ion a ios o he 37 indus ies, Means concluded ha ‘When he dep ession d op o p ices in hese indus ies is compa ed wi h he p opo ion o alue o p oduc which in each was p oduced by he ou la ges en e p ises, a ough ela ion is appa en be ween concen a ion and p ice insensi i i y’ (Na ional Resou ces Commi ee, 1939, p. 142). Means epea edly emphasized ha he exis ence o adminis e ed p ices was no synonymous wi h ‘monopoly p o i s’ and ha he p ocess o indus ial concen a ion did no necessa ily mean a g owing ‘monopoliza ion’: I is . . . abundan ly clea ha a conside able deg ee o adminis a i e con ol is inhe en in he na owing o ma ke s and he willingness o buye s o accep he one-p ice sys em o Ame ican me chandising. Fu he adminis a i e con ols is implici i he e iciencies o mode n echnology a e o be ealized. Only o he ex en ha adminis a i e con ols a ise om collusion be ween en e p ises o h ough he b inging o p oduc ion unde common con ol beyond he ex en necessa y o e icien ope a ion is he e an oppo uni y o educe he exis ing deg ee o adminis a i e con ol wi hou incu ing a cos o dec eased e iciency in he use o esou ces. (Na ional Resou ces Commi ee, 1939, p. 145) In his con ex , economic ‘powe ’ was pe cei ed no so much as an a ibu e o b oade social ela ionships bu mo e as a ace o indus ial o ganiza ion. The powe o de e mine p ices did no deno e he abili y o one g oup o edis ibu e income om ano he , bu a he he abili y o ‘o ganiza ions’ o o e come he ‘ma ke .’ Thus, he appa en link be ween indus ial concen a ion and he adminis a ion o p ices was oo ed p ima ily in he g owing ‘bu eauc a iza ion’ o economic ac i i y: . . . he las cen u y has seen a s eadily inc easing shi om ma ke coo dina ion o adminis a i e coo dina ion. G adually, as ou g ea co po a ions ha e been buil up, mo e and mo e o he coo dina ion o indi idual economic ac ion has been b ough abou adminis a i ely. . . . As a esul o his shi om ma ke o adminis a ion, he a ea o coo dina ion emaining o he ma ke has been g ea ly educed while he inc eased ba gaining powe o he big adminis a i e uni s has induced he coun e concen a ion in he o m o coope a i e ba gaining o ganiza ion, a m coope a i es, labo unions and o a small ex en consume coope a i es, 6 hus u he educing he numbe o sepa a e uni s in e ac ing h ough he ma ke . (Means, 1935b, p. 407) To a signi ican ex en , hen, he ad e se consequences o adminis e ed p ices we e he inescapable p ice we mus all pay o echnological p og ess: Thus a conside able deg ee o adminis a i e con ol o e p ices appea s o be inhe en in he mode n economy. Adminis a i e p ices and hei dep ession insensi i i y seem o be an in eg al pa o he s uc u e o economic ac i i y. Wi h he cen u y-long ansi ion o his coun y om a p edominan ly ag icul u e o a p edominan ly indus ial coun y, he adminis a ion-domina ed p ices o indus y ha e g adually displaced he ma ke -domina ed p ices o ag icul u e as he mo e cha ac e is ic o m o p ices. (Na ional Resou ces Commi ee, 1939, p. 145, emphases added) Al hough Means poin ed o a s uc u al cause unde lying he o e all economic dep ession, he ecommended no o al e bu accommoda e ha s uc u e. B eaking up la ge scale en e p ises in o de o e i e p ice lexibili y, he a gued, would be immensely was e ul in e ms o o egone ou pu and hence he sugges ed we ‘accep in lexible p ices as inhe en in ou mode n economy and build ou economic ins i u ions a ound hem in such a manne ha in lexible adminis e ed p ices will cease o be a dis up i e ac o ’ (Means, 1935b, p. 408). To ha end, he p oposed we adop expansiona y mone a y policies, bu al hough his ecommenda ions we e mac oeconomic in na u e, his analy ical amewo k was oo con o e sial o be unanimously accep ed as a basis o such policies. The idea ha i ms adminis e ed hei p ices wi h a conside able dis ega d o ‘ma ke signals’ challenged basic heo e ical con ic ions abou ‘op imal’ beha iou . Fu he mo e, Means’ p esupposi ion ha such adminis a i e con ol was la gely un ela ed o con en ional no ions o economic ‘powe ’ and ‘monopoly p o i s’ was no su icien ly pe suasi e o de use public conce n. A se ies o Cong essional hea ings on adminis e ed p ices in gene al and on s eel p ices in pa icula began in he la e 1940s and ex ended h ough he 1950s. Guidelines on wage and p ice policies we e issued by he Council o Economic Ad iso s in 1962 and we e aimed pa icula ly a concen a ed indus ies such as s eel, coppe and aluminum. The announcemen o hese Guidelines was ollowed by heigh ened con on a ion be ween he subjec ed indus ies and he P esiden ial o ice and he deba e o e adminis e ed p ices ecei ed conside able public a en ion. Means’ in e p e a ion ha p ice in lexibili y was p edomina ely a ‘ echnical’ ou g ow h o mode n ‘indus ial o ganiza ion’ and his sugges ion ha public policy could ‘o e come’ he p oblem o adminis e ed p ices p esupposed ha , in i sel , he adminis a ion o p ices se ed no pa icula in e es s. Gi en he public u moil o e he issue, his was no a e y con incing assump ion. The e was a g owing a mosphe e o c isis among economis s 7 In gene al, a emp s o deny he exis ence o adminis e ed p ices o hei ‘pe e se’ beha iou we e mo e eassu ing han con incing.10 The c i icisms, pa icula ly when oiced by eminen economis s, helped o educe he anxie y and jus i y he con inued heo e ical neglec o he issue, bu ne e succeeded in e adica ing i .11 Con inued conce n wi h adminis e ed p ices was also uelled by a ela ed deba e which began a abou he same ime and which ocused on how indi idual i ms ac ually se hei p ices. 3. ‘Full-Cos ’ P icing While Means (1935a) ini ia ed a con o e sy o e ‘p ice beha iou ,’ he Ox o d Economis s’ Resea ch G oup, and in pa icula Hall and Hi ch (1939), helped o launch a ela ed deba e o e ‘business beha iou .’ The con en ional heo y o he i m, a gued Hall and Hi ch, s ipula ed ha i ms a emp ed o maximize hei p o i s and ha hey did so by choosing he ou pu -p ice combina ion (o ou pu in he case o pe ec compe i ion) such ha ma ginal e enue was equal o ma ginal cos . This app oach yielded heo e ical solu ions o equilib ium in he case o pu e compe i ion, pu e monopoly o monopolis ic compe i ion, bu when he s uc u e was oligopolis ic o when monopolis ic compe i ion was mixed wi h oligopoly, he heo e ical me hod b oke down. In hose la e ins ances, in e dependency be ween i ms mean ha indi idual demand and ma ginal e enue cu es we e inde e mina e and, hence, could no be used o de e mine he ou pu -p ice combina ion o maximum p o i s. Economis s commonly chose o ei he igno e he di icul y by conside ing oligopoly as an ‘excep ion’ o o bypass i by using some ad-hoc explana ions. Acco ding o Hall and Hi ch, hese wo solu ions we e di ec ed ac s o li e in he s eel indus y, insis on aising a ic i ious p ice? Did he no know ha a simple e ision o ansac ion p ices would ha e se ed his pu pose and also sa ed him om de ec ion by he B.L.S. (and i s henchmen)? In sho , gi en S igle ’s model, M . Blough was ei he a ool o a p o oca eu , hanke ing o a jous wi h he P esiden o he Uni ed S a es. Bo h hese in e p e a ions o M . Blough’s beha io ax c eduli y’ (88 he Cong., 1s Sess., Sena e Subcommi ee on An i us and Monopoly, Sena e Commi ee on he Judicia y, Adminis e ed P ices: A Compendium on Public Policy, 1963, pp. 6-7). Quo ed in Blai (1972, p. 436). 10 Fo example, Weiss (1977) concluded ha o e long pe iod o imes, he Wholesale P ice Index o he BLS, he ‘ ealiza ion’ p ice index based on he Census o Manu ac u ing and he buye s’ index de eloped by he NBER we e highly co ela ed and con eyed he same gene al mo emen s. Cou s, Godley and No dhaus (1978) compa ed lis and ansac ion p ices o non- ood manu ac u ing indus ies in he U.K. and concluded ha ‘The e was li le e idence ound o suppo he iew ha he wholesale p ice indices, being composed o lis ed quo a ions, do no accu a ely measu e ansac ion p ices’ (p. 138). 11 Commen ing on he i le o Blai ’s a icle, ‘Adminis e ed P ices: A Phenomenon in Sea ch o a Theo y,’ Bailey (1959, p. 460) b ushed aside he en i e deba e as i ele an and sugges ed i was in ac ‘A Theo y in Sea ch o a Phenomenon.’ Since hen he ph ase has been o en ci ed as a summa y s a emen on he insigni icance o adminis e ed p ices. 14 owa d he w ong p oblem. In hei opinion, he in e es ing ques ion was no so much how i ms should se hei p ice and ou pu in o de o maximize p o i , bu whe he i ms indeed se p ices and ou pu in o de o maximize p o i . Thei conce n was no wi h wha i ms ough o be doing bu a he wi h wha hey we e ac ually doing. In an a emp o add ess his la e ques ion, Hall and Hi ch conduc ed in e iews wi h 38 B i ish en ep eneu s o which 33 we e in ol ed in manu ac u ing, 3 we e e aile s and 2 we e builde s. Based on hese in e iews, hey poin ed o a wide gap be ween he p esump ions o con en ional analysis and he eali y o business p ac ices: Fo he abo e [neoclassical] analysis i is necessa y ha en ep eneu s should in ac (a) make some es ima e (e en i implici ly) o he elas ici y and posi ion o hei demand cu e, and (b) a emp o equa e es ima ed ma ginal e enue and es ima ed ma ginal cos . We ied, wi h e y li le success, o ge om he en ep eneu s whom we saw, in o ma ion abou elas ici y o demand and abou he ela ion be ween p ice and ma ginal cos . Mos o ou in o man s we e ague abou any hing so p ecise as elas ici y, and since mos o hem p oduce a wide a ie y o p oduc s we did no know how much o ely on illus a i e igu es o cos . In addi ion, many, pe haps mos , appa en ly make no e o , e en implici ly, o es ima e elas ici y o demand o ma ginal (as opposed o a e age p ime) cos ; and o hose who do, he majo i y conside ed he in o ma ion o li le o no ele ance o he p icing p ocess sa e pe haps in e y excep ional condi ions. (p. 18) I seemed ha he heo e ical dis inc ion be ween monopoly o monopolis ic compe i ion (whe e he demand cu e acing he i m was assumed o be known) and oligopoly (whe e he indi idual demand cu es we e inde e mina e) was no e y impo an o he issue o p ac ical p ice de e mina ion. In eali y, businessmen ope a ing in all o hese ma ke s simply did no ‘know’ hei demand cu e and, u he mo e, hey did no ca e o ‘disco e ’ his demand cu e e en when hey could ha e done so: Only whe e oligopoly elemen s a e p esen is he demand cu e ‘inde e mina e’ in he economis ’s sense, bu in he o he cases i is unknown o he en ep eneu , and his seems o be he essen ial poin . I is ue ha in he case o monopoly o monopolis ic compe i ion he possibili y o inding his demand cu e by expe imen ing is open o he en ep eneu ; bu he e a e objec ions o expe imen a ion, and he p ospec o a quie li e seems in many cases o ha e a g ea e appeal. (pp. 30-1, emphases added) 15 The e ela ion ha i ms neglec ed hei demand led o an e en mo e ‘s unning’ conclusion, namely, ha i ms did no y o maximize hei p o i s as sugges ed by s anda d heo y: The mos s iking ea u e o he answe s was he numbe o i ms which appa en ly do no aim in hei p icing policy, a wha appea ed o us o be he maximiza ion o p o i s by he equa ion o ma ginal e enue and ma ginal cos . (p. 18, emphasis added) Ins ead o equa ing ma ginal e enue and ma ginal cos in an a emp o maximize p o i s, Hall and Hi ch (p. 18) sugges ed ha businessmen we e ‘ hinking in al oge he di e en e ms.’ While unde ce ain ci cums ances, p icing beha iou could be explained by e e ence o ‘long- e m’ p o i maximiza ion, in mos cases businessmen applied a simple ‘ ule-o - humb’ which Hall and Hi ch called ‘ ull-cos ’ p icing: The o mula used by he di e en i ms in compu ing ‘ ull cos ’ di e in de ail . . . bu he p ocedu e can be no un ai ly gene alized as ollows: p ime (o ‘di ec ’) cos pe uni is aken as he base, a pe cen age addi ion is made o co e o e heads (o ‘oncos ’, o ‘indi ec ’ cos ), and a u he con en ional addi ion ( equen ly 10 pe cen .) is made o p o i . Selling cos s commonly and in e es on capi al a ely a e included in o e heads; when no so included hey a e allowed o in he addi ion o p o i s. (p. 19) Fi ms jus i ied hei submission o he p ac ical no m o ‘ ull-cos ’ p icing in a a ie y o di e en ways. Some a gued i was he ‘ igh p ice,’ o he conside ed i s applica ion as a ‘ ai ’ p ac ice owa d hei compe i o s, while s ill o he s no ed ha expe ience ‘p o ed i s ad isabili y.’ When asked why hey did no cha ge a p ice highe han ha implied by he ‘ ull-cos ’ p inciple, mos en ep eneu s ci ed hei unce ain y ega ding he esponse o compe i o s. When eques ed o explain why hey would no cha ge a p ice lowe han ‘ ull-cos ,’ he businessmen men ioned p ima ily he ea ha compe i o s would ma ch he lowe p ice, he un esponsi eness o demand and mo al objec ions o selling below cos s. As easons o no changing p ices (howe e ixed), businessmen explained ha hey wished no o ‘dis u b’ he s abili y o ma ke p ices and also ha buye s had a ‘con en ional’ p ice in mind and ‘disliked’ p ice changes. Hall and Hi ch (p. 22, emphasis added) el ha ‘All o hese easons mili a e agains changing he p ice om he con en ional le el,’ ye hey s essed ha he ‘ ull-cos ’ p inciple was insu icien o explain his ‘con en ional le el’ i sel . The simplici y o he ‘ ull-cos ’ p inciple was po en ially decei ing. ‘I would be use ul o economic analysis,’ Hall and Hi ch (p. 19-20) w o e, ‘i he magni ude o “ ull cos ” in any case could be deduced om he echnical condi ions o p oduc ion 16 and he supply p ices o he ac o s,’ bu in p ac ice his was impossible o ou p incipal easons. Fi s , cos s a ied wi h he size o he i m bu i ms we e a ely ope a ing a an ‘op imal’ size which economis s could p esumably de e mine; ins ead, hei size appa en ly was he consequence o a ‘his o ical acciden ’ which economis s ound e y di icul o ‘p edic .’ Second, o e head cos pe uni depended on he ‘no mal’ ou pu le el used as a di iso in he ‘ ull-cos ’ o mula, bu his benchma k o ou pu was se by a bi a y accoun ing con en ions. Thi d, selling expenses we e included in cos s bu we e o en depended on demand. Fou h and mos impo an ly, he way in which en ep eneu s se he magni ude o ‘con en ional’ p o i , o he easons why hey changed i we e no a all clea . Fo he businessmen, he ‘ ull-cos ’ p inciple was a s aigh o wa d echnical ma e ye , because o he many ‘a bi a y’ ac o s in ol ed, he economis could no an icipa e he inal p ice wi h any easonable accu acy. Su p isingly, hen, ge ing close o eali y did no seem o enhance ou unde s anding o he p icing p ocess. Hall and Hi ch ques ioned he use ulness o neoclassical p ice heo y because i s p eoccupa ion wi h wha i ms ough o be doing u ned his heo y in o a no ma i e doc ine. They sugges ed we explain p ices by emba king on a posi i e scien i ic inqui y in o ac ual p icing decisions made by eal businessmen bu , un o una ely, subs i u ing he businessman’s p ac ice o he economis ’s pos ula e did no seem o sol e he p ice ques ion. The explana ion p o ided by businessmen appea ed ‘a bi a y’ and we e ha dly mo e e ealing han he heo ies o neoclassical economis s. Ins ead o adhe ing o igid p icing p ocedu es shaped by necessi y, en ep eneu s seemed o ollow loose ‘con en ions’ and ‘no ms o conduc ’ which did no appea o ha e a solid ‘objec i e’ a ionale. Hall and Hi ch disca ded he no ma i e app oach emb aced by economis s, bu hei own ‘ ull-cos ’ p inciple seemed o e lec he no ma i e e hic adop ed by businessmen. One could ha e emo ed he deadlock by seeking psychological explana ions o he beha iou o businessmen bu his, o cou se, would ha e cons i u ed a e ea om he empi ical oad in o he no ma i e wiligh . Ins ead, Hall and Hi ch (p. 33) emphasized ha ‘The e is usually some elemen in he p ices uling a any ime which can only be explained in he ligh o he his o y o he indus y.’ The ule-o - humb o p icing included con en ions on wha cons i u ed ‘no mal ou pu ,’ con en ions on how o es ima e cos s, con en ions on how o eac o coope a e wi h compe i o s and, mos impo an ly, con en ions on how o se ‘adequa e’ p o i ma gins. Ye hese con en ions we e shaped by his o y, no by he e a ic ancy o businessmen and only by accoun ing o he speci ic his o ical e olu ion o hese con en ions could one hope o shed some ligh on cu en p ices. The o ali y o belie s and con en ions p e ailing in any one ime we e encompassed in wha Hall and Hi ch (p. 28) called he ‘communi y o ou look’ o businessmen, and i was wi hin his con ex ha ‘ ull-cos ’ p icing ein o ced a endency owa d p ice s abili y: 17 We canno say p ecisely wha his p ice will be, o easons al eady explained; i i is se anywhe e o e a ai ly wide ange i will ha e a endency o s ay he e. The nea es ha we can ge o an exac s a emen is ha he p ice uling whe e hese condi ions ob ain is likely o app oxima e o he ull cos o he ep esen a i e i m; and ha his p ice is eached di ec ly h ough he communi y o ou look o business men, a he han indi ec ly h ough each i m wo king a wha i s mos p o i able ou pu would be i compe i o s’ eac ions a e neglec ed, and i he play o compe i ion hen a ied he numbe o i ms. (pp. 27-8, emphasis added) In a simila way, p ice ins abili y was no a di ec consequence o changes in unde lying condi ions bu was a he c ea ed indi ec ly when such changes led indi idual en ep eneu s o ques ion he p e ailing ‘communi y o ou look’: P ices in an indus y become ‘uns able’ as soon as any o he compe i o s o m an idea o a p o i able p ice which is ma kedly di e en om he exis ing p ices. (p. 28) ‘Full-cos ’ p icing implied ha p ices would likely be al e ed in esponse o signi ican changes in he cos o labou o aw ma e ial bu ha , no mally, businessmen would no ques ion he exis ing p ice s uc u e as a esul o mode a e o ansi o y changes in demand. As He lebowe (1955, p. 361) indica ed, he new he esy o ‘ ull-cos ’ p icing p o ided an appealing explana ion o ela i e p ice s abili y du ing he Dep ession, especially a e he indings o Hall and Hi ch we e suppo ed by subsequen s udies like Sax on (1942), Les e (1946), Dean (1951) Oxen eld (1951), Fog (1960), Cye and Ma ch (1963) and Skinne (1970).12 Ne e heless, he imp ecise na u e o he new app oach le i open o c i icism om mains eam economis s who we e quick o espond. 4. The Ma ginalis s’ Coun e a ack The p oposi ion ha businessmen did no y o maximize hei p o i s bu a he we e con en wi h he quie li e o ‘ ull-cos ’ p icing was no uni e sally accep ed by economis s. Leading he neoclassicis s’ coun e a ack, Machlup (1946) a gued ha he ejec ion o ma ginal analysis by empi ical esea che s such as Hall and Hi ch (1939) and Les e (1946) was in ac baseless.13 In his opinion, Hall and Hi ch and hei ollowe s e ed because hei esea ch su e ed om one o mo e o he ollowing sho comings: (1) a ailu e o p ope ly unde s and he essence o ma ginal 12 Fo su eys o ‘ ull-cos ’ p icing, see He lebowe (1955) and Silbe s on (1970). 13 Simila c i icisms o ‘ ull-cos ’ p icing appea ed in Robinson (1939) and Kahn (1952). 18 analysis, (2) aul y esea ch echniques, and (3) mis aken in e p e a ions o empi ical ‘ indings.’ Le us conside hese c i icisms in some de ail.14 Acco ding o Machlup (p. 521), he emphasis Hall and Hi ch pu on he ‘his o y o he indus y’ in de e mining cu en condi ions and in shaping beha iou was ‘by no means denied by ma ginal analysis.’ Con a y o common belie s, he insis ed, neoclassical heo y ecognized he ole o his o y and, hence, did no eally seek o explain how an indi idual i m de e mined he le els o i s ou pu , p ices and employmen . Ra he , he heo y ocused on how he i m al e ed hese a iables in esponse o changing condi ions. The o e iding p inciple which guided he i m in i s ac ions was he aim o maximum p o i and ma ginal analysis was me ely a echnique used o achie e his goal. Machlup emphasized ha he p ocedu e whe eby he i m equa ed ma ginal e enue and cos mus be in e p e ed wi h g ea ca e. Fi s , he magni udes o he ele an a iables we e ‘subjec i e es ima es, guesses and hunches.’ They e lec ed he pe cep ions, opinions, and belie s o he businessman and we e no necessa ily equal o he co esponding ‘objec i e’ magni udes as hey migh be obse ed by ‘ou side’ pa ies. Second, he businessmen need no be engaged in edious da a collec ion and complica ed calcula ions in o de o equa e ma ginal e enue and cos . In mos cases he could ely on his in ima e knowledge o his own business and ollow an imp ecise ‘ ou ine’ which ne e heless accoun ed o all c ucial ac o s: The business man who equa es ma ginal ne e enue p oduc i i y and ma ginal ac o cos when he decides how many o employ need no engage in highe ma hema ics, geome y, o clai oyance. O dina ily he would no e en consul wi h his accoun an o e iciency expe in o de o a i e a his decision; he would no make any es s o o mal calcula ions, he would simply ely on his sense o his eel o he si ua ion. The e is no hing e y exac abou his so o es ima e. On he basis o hund eds o p e ious expe iences o a amilia na u e he business man would “jus know,” in a ague and ough way, whe he o no i would pay him o hi e mo e men. The subjec i i y o his judgemen s is ob ious. (p. 535) Thus, con a y o he in e ence o Hall and Hi ch (1939) and o he s, he obse a ion ha businessmen could no o simply did no know all he objec i e da a, and he ac ha hey did no pe o m complica ed compu a ions ailed o demons a e ha i ms did no seek o maximize p o i . Hall and Hi ch u he sugges ed ha en ep eneu s did no make use o concep s such as ‘demand elas ici y,’ ‘ma ginal e enue’ and ‘ma ginal cos ,’ and in many cases did no e en unde s and hem bu , acco ding o Machlup, his also did no 14 Fo u he eplies and ejoinde s see Les e (1947), Machlup (1947) and S igle (1947). La e commen s can be ound in Machlup (1967). 19 in alida e he s anda d heo y. While en ep eneu s migh ha e ailed o unde s and he ma ginal concep s as p esen ed o hem by Hall and Hi ch, hey ha e no necessa ily ailed he c ucial es o ma ginalism. The ma ginal heo y did no s ipula e ha businessmen mus use he ja gon o ma ginal analysis as de eloped by economis s, only ha hey ollow he ma ginal p inciples. Businessmen had no in e es in he equali y o ma ginal cos and e enue pe se bu only inso a as i helped hem e alua e how hei ac ion migh a ec o al p o i . Fo ha pu pose hey could also use many o he guidelines which, al hough exp essed in a di e en language, had p ac ically he same meaning. Fo ins ance, a i m migh decide o aise i s p ice because i expec ed uni p o i o ise by a g ea e pe cen age han he all in quan i y sold. The decision was based on ‘a e ages’ and ‘ o als’ ye he logic was ma ginal o he ocus was on he expec ed change in p o i . Gi en ha Hall and Hi ch misunde s ood he h us o ma ginal analysis, and gi en ha hey ba led he en ep eneu s wi h academic ja gon, i was ha dly su p ising ha he wo esea che s also de i ed e oneous conclusions om hei da a. To explain his la e poin , Machlup (p. 545) summa ized he indings o Hall and Hi ch in hei own wo ds: “A la ge majo i y” o hem [o businessmen] explained ha hey cha ged he “ ull cos ” p ice. Some, howe e , admi ed “ ha hey migh cha ge mo e in pe iods o excep ionally high demand”; and a g ea e numbe epo ed “ ha hey migh cha ge less in pe iods o excep ionally dep essed demand.” Compe i ion seemed o induce “ i ms o modi y he ma gins o p o i s which could be added o di ec cos s and o e heads.” Mo eo e , “ he con en ional addi ion o p o i a ies om i m o i m and e en wi hin i ms o di e en p oduc s.” Acco ding o Machlup (ibid.) hese indings, which appa en ly ‘shook he esea che s’ con idence in he ma ginal p inciple and con inced hem ha business men ollowed he “ ull cos p inciple” o p icing ega dless o p o i maximiza ion,’ we e exac ly wha one would expec o hea on he basis o ma ginal analysis! Indeed, in he neoclassical amewo k: we should expec o mos indus ies ha p ice in he long un would no de ia e oo much om a e age cos , ye ha he i m would a emp o ge be e p ices when i could sa ely ge hem and would no e ain om cu ing p ices when i belie ed ha his would inc ease i s p o i o educe i s losses. (ibid.) The obse a ion ha di e en i ms beha ed di e en ly and ha hei expe ience also a y o e ime p o ed, in Machlup’s opinion, ha i ms paid close a en ion o 20 a iables o he han a e age cos and, in pa icula , o hose a iables which a ec ed hei demand. In gene al, he summa ized, he e is li le o no hing in he indings o his inqui y [by Hall and Hi ch] ha would indica e ha he business men obse ed an a e age-cos ule o p icing when such obse ance was inconsis en wi h he maximiza ion o p o i p inciple. On he o he hand, he e is plen y o e idence in he indings ha he business men paid much a en ion o demand elas ici ies – which o he economis is equi alen o ma ginal e enue conside a ions. (p. 546) Ma ginalis s a acked ‘ ull-cos ’ p icing on me hodological g ounds and hence i is in e es ing o no e ha hei own c i icisms su e ed om simila me hodological sho comings. One impo an complain agains Hall and Hi ch was ha iews o businessmen we e no subs i u e o economic heo y. Kahn (1952, p. 126), o ins ance, s a ed ha he undamen al doub is whe he hese business men, and o he business men in simila p edicamen s, did no eel called upon o de ise and p esen o he Ox o d in ellec uals, a heo y o business beha iou which is p ima ily a a ionaliza ion and, in conside able measu e a alse a ionaliza ion o beha iou based on ins inc a he han easoning. I is wi h business men’s beha iou no wi h hei hough s, ha we ha e o eckon. The economic heo y o a business man may be based on he concep o a ai p ice, which is he p ice which, i is belie ed, in he absence o special ci cums ances, ough o ule. Bu e y o en his heo y is a heo y o e hics a he han o economics, and he business man akes he bes p ice ha he can ge ( h ough i his is highe han he ai p ice he may be eluc an o ex o i o he ull). The ma ginalis s ejec ed he explana ions o businessmen o ‘ ull-cos ’ p icing as me e ‘e hics,’ ‘ a ionaliza ion’ and e en ‘ alse a ionaliza ion,’ ye hei dismissal o e idence appea ed o be qui e selec i e. When he same businessmen epo ed on de ia ions om ‘ ull-cos ’ p icing, Kahn and Machlup we e only oo eage o ci e hem as decisi e con i ma ion o p o i maximiza ion. The basis o his selec i e use o e idence is no clea . Machlup (p. 538) w o e ha ‘I akes an expe ienced analys o disen angle ac ual om imagina y easons and o sepa a e ele an om i ele an da a and essen ial om deco a i e bi s o in o ma ion u nished,’ bu he ailed o enume a e he c i e ia he himsel ollowed in sc eening he e idence p o ided by Hall and Hi ch. I , as Kahn so o ce ully asse s, we ha e o eckon wi h ‘beha iou ’ a he han ‘ hough s’ hen e e y in e p e a ion p o ided by businessmen – whe he i is consis en o inconsis en wi h he economic heo y unde examina ion – is simply ex aneous o ou pu pose. 21 Beyond his double s anda d owa d e idence, he ci a ion om Kahn aises an e en mo e se ious di icul y conce ning ou abili y o p o e o e u e he no m o p o i maximiza ion. A ‘his o ical’ app oach o economic heo y could emphasize o ces beyond he pa icula inclina ions o indi iduals and claim ha , o a la ge ex en , indi idual opinions and con ic ions a e shaped by hese o ces. Hence, he empi ical basis o es ing such a his o ical heo y o p ices can indeed be independen om he ‘business c eed.’ This conclusion does no hold o neoclassical p ice heo y, howe e . The la e is a heo y based on mo i a ion and as such can be es ed only by eso ing o di ec e idence on mo i a ion. To say ha business beha iou is go e ned by he aim o maximum p o i and hen o a gue ha he s a ed goals o businessmen canno be used as e idence in es ing he heo y seems o us qui e inconsis en . Wi hou such di ec e idence on mo i a ion he neoclassical heo y o p o i maximiza ion amoun s o ei he a no ma i e ecommenda ion o businessmen on how hey should ac , o else i is simply an axioma ic cons uc . The ma ginalis s could o cou se claim ha , while hey did no ha e di ec suppo o he mo i a ional heo em o p o i maximiza ion, he obse a ion o business pe o mance could p o ide an indi ec es o his basic neoclassical pos ula e. This, howe e , is easie said han done. Fo example, Kahn (1952, p. 127) concludes ha obse ed pe o mances do no lend clea suppo o ei he ‘ ull-cos ’ p icing o p o i maximiza ion: The ac ual beha iou o p ices and p o i s – as e ealed by compa isons o di e en i ms and p oduc s and o di e en poin s o ime – ails o suppo he “ ull-cos ” p inciple in i s undilu ed o m. Bu i ails equally o suppo , in i s undilu ed o m, a na ow in e p e a ion o he ope a ion o he p o i mo i e. (emphasis added) Ye he bases o such conclusions a e no cla i ied by Kahn. We do no ha e an empi ical ya ds ick o ‘maximum p o i ’ so we canno eally de e mine whe he i ms ob ained his maximum o no . Fu he mo e, we canno use business pe o mance as e idence o business mo i a ion. E en i we somehow knew wha maximum p o i we e and e en i we obse ed ha i ms indeed ob ained his maximum, he e would be no hing in his obse a ion o demons a e ha i ms sough maximum p o i . Fi ms could ob ain maximum p o i by acciden o e en despi e hei e o s o a ain ano he goal. Al e na i ely, i ms could s i e owa d maximum p o i s bu pe sis en ly ail o achie e hem. In sho , he goal o maximum p o i can be demons a ed by in e iews wi h businessmen o can be simply s ipula ed by he economis , bu i canno be p o en o e u ed by business pe o mance. The second impo an c i icism agains Hall and Hi ch was ha businessmen ac ed no on he basis o objec i e ci cums ances, bu a he on he basis o hei own subjec i e in e p e a ions o hese condi ions. In pa icula , i did no ma e ha 22 en ep eneu s did no know he objec i e demand cu e as long as hey ac ed on he basis o hei subjec i e no ion o ha cu e. This explica ion o he neoclassical heo y is also p oblema ic because p o i maximiza ion becomes consis en wi h e e y cou se o ac ion. I , acing an inc ease in demand, businessmen inc ease hei p ices we can a gue ha p o i maximiza ion is indica ed, bu we can de i e he same conclusion i businessmen lowe hei p ices ins ead! In his la e case, we can simply a gue ha businessmen a emp ed o maximize p o i s on he basis o e oneous in e p e a ions o cu en condi ions. I o some eason hey belie ed ha demand ell o was jus abou o all, a policy o educe p ices would ha e been qui e consis en wi h p o i maximiza ion, despi e he ‘objec i e’ inc ease in demand. Thus, i would appea ha when p o i maximiza ion is based on subjec i e pe cep ions o businessmen and when hese pe cep ions canno be accu a ely obse ed because we canno ely on wha businessmen ell us, he heo y becomes i e u able. Bo h adhe en s o ‘ ull-cos ’ p icing and ad oca es o p o i maximiza ion a gued ha hei heo ies explained business beha iou . They also acknowledged ha hese heo ies could no be used o p edic p ices. Acco ding o Robinson (1966), he wo doc ines aced he same ba ie mainly because hey we e unable o explain he p o i ma gin. In he ‘ ull-cos ’ app oach, p ice was de e mined by adding o obse ed uni cos a ce ain p o i ma kup bu his addendum was admi edly ‘a bi a y’: The g oss p o i ma gin, o ake-o on p ice cos . . . p obably depends e y much upon his o ical acciden o upon con en ional iews among business men as o wha is easonable. And any con en ional pa e n o beha iou which es ablished i sel amongs an impe ec ly compe i i e g oup p o ides a s able esul . So long as all adhe e o he same se o con en ions each can enjoy his sha e o he ma ke , and each can imagine ha he is ac ing acco ding o he s ic ules o compe i ion, hough in ac he g oup as a whole, by unconscious collusion, a e imposing a mild deg ee o monopoly upon he ma ke . . . . Whe e ou igh monopoly ules, o whe e a g oup o commodi ies is p oduced by a ew powe ul i ms, he e is g ea scope o indi idual a ia ions in policy, and i is ha d o make any gene aliza ion a all as o wha go e ns he ma gin o p o i pe uni o ou pu . (Robinson, 1966, pp. 78-9) Fo he neoclassicis s, on he o he hand, he p ice was de e mined when he businessmen a emp ed o maximize his p o i by equa ing ma ginal e enue and ma ginal cos . The magni udes o ma ginal e enue and cos , howe e , we e no as clea in p ac ice as hey we e in heo y. The businessmen did no use he ‘ ue’ alue om ma ginal e enue bu a he his subjec i e in e p e a ion o i . Fu he mo e, ma ginal cos included, in addi ion o obse ed expenses, an unspeci ied igu e o ‘no mal’ p o i which he en ep eneu p esumably added o co e his ‘oppo uni y 23 could no be desc ibed by simple mechanisms. This p esen ed a se ious me hodological di icul y o he heo y o p ice mo emen s. The success o neoclassical p ice heo y was con ingen , o a la ge ex en , on he abili y o his heo y o abs ac om unde lying dynamics o economic and o he social ela ions. The ocus on p ice as he ul ima e a iable o in e es was equi ed o educe social ela ions and aspec s o economic s uc u e in o a simple s a ic amewo k. Fi ms a e commonly assumed o ope a e in one o 4 possible ma ke s uc u es, which a e ixed o he pu pose o analysis. The s uc u e a ec s he way i ms se hei p ices bu , since his s uc u e is assumed o be ixed, i canno be al e ed by p ice beha iou . No e ha he s a ic amewo k is no me ely he i s s ep owa d a b oade dynamic heo y as neoclassicis s o en like o s ess. I we allow p ice beha iou by i ms such as IBM, Gene al Mo o s o Exxon o al e he economic en i onmen in which hey ope a e, we in oduce a undamen al ‘non-s a iona i y’ ha is likely o unde mine ou abili y o ‘p edic ’ such p ice beha iou . Fo his eason, he assump ion ha s uc u e a ec s p ices bu p ices do no a ec s uc u e is qui e undamen al o neoclassical heo y. This s a iona i y equi emen also explains why i is necessa y o assume ha a businessman is a sla e o a single ixed goal such as ‘p o i maximiza ion.’ Wi hou a clea goal, he unc ional link be ween objec i e condi ions and p ice beha iou is se e ed and p ices become ‘a bi a y.’ The new ambigui ies ega ding he au onomy and di e si y o business beha iou in mode n capi alis economies emo ed much o he s a iona i y necessa y o a solid p ice heo y. In he neoclassical pa adigm, he heo is could igno e he axioma ic na u e o ‘p o i maximiza ion’ because his assump ion was deeply embedded wi hin he model and was a ely ques ioned. Wi h he enla ged menu o po en ial pa e ns o business beha iou , hings became mo e complica ed. The obse a ion ha p icing goals and p ac ices we e no eally ixed and changed wi h business condi ions sugges ed ha we could no igno e s uc u al dynamics in ou explana ion o p ices. I also insinua ed ha he beha iou o p ices could ope a e o a ec unde lying s uc u es. Many economis s, i mus be no ed, ailed o ealize ha he expanding ield o ‘business an h opology’ c ea ed a me hodological mine ield. Ins ead o shying away om a bi a y assump ions abou ‘business mo i a ion,’ many p e e ed o igno e he po en ial haza d and ac ually welcomed hei new eedom o chose. The esul has been a lood o al e na i e models o in la ion which could be dis inguished mainly on he basis o hei a bi a y beha iou ial assump ions. We conside some o hese models in Ni zan (1990). 30 Re e ences Bailey, M.J. 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