Keynes notes that the whole concept of marginal cost as the main cause of price determination is grossly exaggerated:“Indeed, it is rare for anyone but an economist to suppose that price is predominantly governed by marginal cost. Most business men are surprised by the suggestion that it is a close calculation of short-period marginal cost or of marginal revenue which should dominate their price policies. They maintain that such a policy would rapidly land in bankruptcy anyone who practised it.
Social Democracy For The 21St Century: A Post Keynesian Perspective
Keynes on Marginal Cost and Price
Lord Keynes
Keynes on Marginal Cost and Price
Lord Keynes
3 comments:
“Most business men are surprised by the suggestion that it is a close calculation of short-period marginal cost or of marginal revenue which should dominate their price policies.”
The marginal cost pricing idea does not claim that there’s any “close calculation” involved. The claim is that employers are driven towards marginal cost pricing whether they like it or not.
E.g.if a particular form of economic activity is extremely profitable, additional entrepreneurs will enter the business concerned. Competition will drive down prices to the point where marginal prices equal marginal costs.
Read the post. Turns out that most business owners are right and economists are wrong. Marginalists are working out of a model that doesn't fit reality. Makes perfect sense mathematically but it's not the way the business world works, which is why business people don't pay much attention to economists.
"The marginal cost pricing idea does not claim that there’s any “close calculation” involved."
That is *modern* marginalist theory after the marginal pricing controversy.
At the time of the first serious empirical work on pricing by the Oxford Economists’ Research Group (OERG) and Hall and Hitch, neoclassical economists really were expecting to find business people knowledgeable about marginal cost:
http://socialdemocracy21stcentury.blogspot.com/2013/08/lees-post-keynesian-price-theory_17.html
http://socialdemocracy21stcentury.blogspot.com/2013/11/hall-and-hitch-on-marginal-cost-and.html
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