LavoieonMark-upPricinginNeoclassicalTheory
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Marc Lavoie writes here:
“While Post Keynesians have long endorsed cost-plus pricing, mainstream economists have recently begun to make use of markup pricing. Mainstream authors … usually point out that a markup over unit variable costs is consistent with profit maximization – the markup depends on the elasticity of demand and is set to equate marginal cost and marginal revenue. This interpretation can also be found in some earlier works of Kalecki and has been endorsed by Cowling (1982). On this view markup pricing appears to be profit maximization under conditions of imperfect competition, in a trial-and-error disguise.
There are two responses to this claim. First, a number of authors have pointed out that demand elasticities computed in empirical studies are inconsistent with this profit-maximizing interpretation of markup pricing. In particular, Koutsoyiannis (1984) found that for most industries the price-elasticity of demand is below one. This implies that marginal revenue is negative, which contradicts the hypothesis of profit maximization, for marginal costs cannot be negative. Second, accounting studies and economic surveys have shown that the most frequent pricing procedure is normal-cost pricing. But normal-cost pricing, in its modern incarnation, takes unit fixed costs or unit overhead costs into account, and not just marginal or variable costs. Normal cost-pricing and target-return pricing are thus incompatible with profit-maximizing neoclassical theories, since the latter presume that overhead costs or fixed costs play no role in the determination of prices.” (Lavoie 2001: 25).
The lesson is to beware of neoclassical re-interpretations of administered pricing.
One must not confuse the neoclassical concept of marginal costs with average costs of production per unit. The two are not the same thing.
And, above all, the administered pricing behaviour of many firms is inconsistent with the idea of profit-maximisation in neoclassical theory.
BIBLIOGRAPHY
Koutsoyiannis, A. 1984. “Goals of Oligopolistic Firms: An Empirical Test of Competing Hypotheses,” Southern Economic Journal 51.2: 540–567.
Lavoie, M. 2001. “Pricing,” in Richard P. F. Holt and Steven Pressman (eds.), A New Guide to Post Keynesian Economics. Routledge, London and New York. 21–31.
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