I’m reading a funny little book, Pricing By Truman Bewley. He still did something very unusual for an economist. Great job (by Stefanie Stantcheva): Ask people what they think. In this case, for years, I have been asking hundreds of American companies how to set prices.
largely BooK is made up of direct quotes from interviewees from various industries. Two types of pricing have appeared, including manufacturing, restaurants, construction, and feed grain. Sellers of highly differentiated products rarely cut prices based on relatively inelastic demand. Customers don’t let too many disrupt to raise prices and fall into the position that they need to do so. Sellers of commoditized products vary widely in prices, but they are increasingly turning their eyes to “formula-based pricing,” such as indexing into specific spot prices and price series published by trade organizations.
No one ever mentioned monetary policy or the Fed. They also did not talk about their decisions in terms of cost-based pricing and stable marginal variable costs. Bewley said: “The marginal variable costs of a manufacturer tend to remain constant until capacity is reached or decrease as a function of output. He is counterintuitive, but when you think about the vintage of capital and capacity utilization patterns, it doesn’t seem to me.
In fact, the Martian explorer’s book has a rather loving tone that attempts to explain humans to his fellow Martians in his own Martian language. Companies don’t think about it in standard economic concepts, so what they say requires translation. Similarly, productivity and other concepts are undoubtedly.
Another idea is to assume that margin economists are not important choice variables. Other margins (quality, technology…) can be more important. When I was on the UK Competition Commission and asked about pricing, the answer was almost always “what the market can withstand” and other variables were obsessed with management, but obviously this was a sample of myself finding myself in the competition investigation.
Anyway, I’d like to praise Truman Bewley for embarking on this interplanetary exploration. It’s kind Books Economists (including macro types) should read before picking up a modeling pencil.
