In a very narrow mechanical sense, it's the second party to agree to a transaction that sets the price. Until the sale occurs, a posted price isn't a price; it's just a dream.
It doesn't matter what the seller writes on the sticker. It isn't a transacted price unless a buyer agrees to pay it.
I've seen the phenomenon with housing prices and with ebay listings for obscure items. The active listings generally have higher prices than the completed sales. That's because the cheap ones get sold!
You're conflating between two different questions:
1. How is price determined?
2. What is the *direction* of price?
These are not the same thing. Administered pricing does undercut conventional marginalist theory of pricing. It shows that companies treat their units evenly, and markup their costs for the final price. This is an objective approach of the real worth of goods. Supply and demand will only determine levels of quantities sold/bought, not price levels.
However, in the long run, the market is always "pushed" by either sellers who compete against each other or buyers who compete against each other. The former suggests an increase in levels of productivity. The latter suggests a decrease in levels of productivity. Here, the dynamic of the market, in terms of productivity, is responsible for the direction of prices (up or down).
The complaint that firms have "power" over consumers is of course absurd and derives from a hatred of capitalism, but this shouldn't dissuade one from taking the empirical evidence of administered pricing seriously. It only means that an alternative theory to marginalism is required.
“Basic economic theory says it cannot be true in general.”
I do indeed agree with you for the most part. But “basic economic theory” does *not* say it cannot be true in general, unless there is perfect competition.
A decidedly unrealistic claim about most markets.
“Monopolistic competition” (the term in vogue when I studied economics; perhaps there is a newer one) is a better description of most actual markets, with firms trying to differentiate their products through various and sundry means (innovation, quality, branding, tech support, etc., etc., etc.) precisely so that they CAN earn some profits beyond the cost of capital, and precisely so they can have *some* measure of pricing power.
Now I’m not claiming that firms have full power to set prices, given that there are substitutes, but I repeat that your above claim is too strong for anything but fairly “pure” commodities.
In today’s economy more and more the supplier and consumer are decoupled by supply chains( example beef, eggs) financing schemes (for example healthcare), managed distribution (electricity), pharma (PBM). Instead of the much feared and destructive government price fixing, we are seeing a destructive corporate (via near monopolies and financial engineering) price and supply manipulation. Free market supply demand curves are being broken.
Not sure why anyone would care, but should the cross in the second figure corresponding to the new equilibrium be green (like demand)?
Fair. I was too fast with AI generating graphs
Huge fan of your writing. Prob should have led w/ that. It’s a great public service.
In a very narrow mechanical sense, it's the second party to agree to a transaction that sets the price. Until the sale occurs, a posted price isn't a price; it's just a dream.
It doesn't matter what the seller writes on the sticker. It isn't a transacted price unless a buyer agrees to pay it.
I've seen the phenomenon with housing prices and with ebay listings for obscure items. The active listings generally have higher prices than the completed sales. That's because the cheap ones get sold!
Man, we have a model for firms that ser prices: It is named “monopolístic competition”, and it creates its own equilibrium.
https://www.foltyn.net/wp-content/uploads/2009/12/dixitstiglitz.pdf
A funny thing: this equilibrium is more general than general equilibrium.
You're conflating between two different questions:
1. How is price determined?
2. What is the *direction* of price?
These are not the same thing. Administered pricing does undercut conventional marginalist theory of pricing. It shows that companies treat their units evenly, and markup their costs for the final price. This is an objective approach of the real worth of goods. Supply and demand will only determine levels of quantities sold/bought, not price levels.
However, in the long run, the market is always "pushed" by either sellers who compete against each other or buyers who compete against each other. The former suggests an increase in levels of productivity. The latter suggests a decrease in levels of productivity. Here, the dynamic of the market, in terms of productivity, is responsible for the direction of prices (up or down).
The complaint that firms have "power" over consumers is of course absurd and derives from a hatred of capitalism, but this shouldn't dissuade one from taking the empirical evidence of administered pricing seriously. It only means that an alternative theory to marginalism is required.
How does one analyse this in terms of the intersection of supply and demand?
“Basic economic theory says it cannot be true in general.”
I do indeed agree with you for the most part. But “basic economic theory” does *not* say it cannot be true in general, unless there is perfect competition.
A decidedly unrealistic claim about most markets.
“Monopolistic competition” (the term in vogue when I studied economics; perhaps there is a newer one) is a better description of most actual markets, with firms trying to differentiate their products through various and sundry means (innovation, quality, branding, tech support, etc., etc., etc.) precisely so that they CAN earn some profits beyond the cost of capital, and precisely so they can have *some* measure of pricing power.
Now I’m not claiming that firms have full power to set prices, given that there are substitutes, but I repeat that your above claim is too strong for anything but fairly “pure” commodities.
In today’s economy more and more the supplier and consumer are decoupled by supply chains( example beef, eggs) financing schemes (for example healthcare), managed distribution (electricity), pharma (PBM). Instead of the much feared and destructive government price fixing, we are seeing a destructive corporate (via near monopolies and financial engineering) price and supply manipulation. Free market supply demand curves are being broken.