LavoieonAdministeredPrices
http://feedly.com/k/17gRzR0

Short and concise, but insightful:

“… prices set by [sc. fixprice] firms in the short run are not market-clearing prices, and are not even intended to be so. According to Lee …, this was the most striking lesson to be drawn both from Mean’s administered prices and from the surveys conducted by Hall and Hitch (1939). The novel and radical feature of the classic article of the latter was that prices are not designed to clear markets. Prices are not such that they equate supply and demand schedules. In a context where supply is flexible, firms do not necessarily attempt to equate demand to the normal use of capacity when they set prices.” (Lavoie 1992: 95).

It is also clear that administered prices are not simply a phenomenon confined to monopolistic or oligopolistic markets, but are widespread in modern market economies and found throughout many other markets where competition exists amongst numerous small or medium-sized firms (Lavoie 1992: 95–96).

The consequences of this are the following:

(1) one of the major (alleged) mechanisms driving an economy to Walrasian full employment equilibrium collapses and the whole notion that market economies have a strong tendency to general equilibrium must be abandoned, and

(2) the Austrian (or Misesian) notion that market economies have a strong tendency to economic coordination effected by firms’ adjusting their prices towards market clearing values is fundamentally flawed and wrong.

BIBLIOGRAPHY
Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” OxfordEconomicPapers 2: 12–45.

Lavoie, Marc. 1992. Foundationsof Post-KeynesianEconomicAnalysis. Edward Elgar Publishing, Aldershot.

shared via http://feedly.com