A PRICE‐MINUS THEORY OF COST?
| DOI | http://doi.org/10.1111/j.1467-9485.1967.tb00761.x |
| Date | 01 June 1967 |
| Author | R. L. Smyth |
| Published date | 01 June 1967 |
A
PRICE-MINUS THEORY OF COST?
R.
L.
SMYTH
‘Presumably the most successful
firms
are those who do
not take the conventions of cost accounting too seriously.’
-Joan
Robinson.
IN
1939
R.
L.
Hall and C.
J.
Hitch introduced two complementary
propositions: firstly, businessmen rarely
aim
io
maximise their profits
in the short-run; secondly, in manufacturing business prices are deter-
mined by adding margins
to
direct costs to cover overheads and profit
margins, and output is adjusted to the demand that is forthcoming at
the cost-determined prices. Their article, now, deservedly, ranks as a
classic.’ For good measure the notion of the just price was resurrected,
the possibility that demand curves are kinked was raised, and attention
was directed away from deductive reasoning from selected postulates
towards discovering what businessmen actually do. It is my intention
in this article to argue that the second proposition is less securely
founded than the first one. It is tempting to regard cost-plus pricing
as something which follows inevitably from non-profit-maximising
behaviour. However, it is possible to give more weight to demand or
market conditions in determining prices without aiming to maximise
short-run profits.
I
also wish to suggest that businessmen frequently
work from prices back to costs, and that
a
price-minus theory of cost
is no less realistic than a cost-plus theory of price.
It is clearly stated in the Hall and Hitch article that businessmen
sometimes adjust their costs to conform with established prices:
‘An
overwhelming majority
of
the entrepreneurs thought that a price based
on full average cost (including a conventional allowance for profit)
was the
“
right
”
price, and one which
“
ought
”
to be charged, in some
cases this meant computing the full cost of
a
“given” commodity,
and
charging
a
price equal to cost. In others it meant working from
some traditional or convenient price, which had been proved acceptable
to consumers, and adjusting the quality
of
the article until its full
cost equalled the
“
given
”
price.
.
.
.’*
Because the majority of
firms
investigated by the Oxford economists in 1939 tended to base their
‘
Price Theory and Business Behaviour
’,
Oxford Economic Papers,
No.
2,
May 1939. Reprinted in
Oxford Studies in the Price Mechanism,
edited
by
T.
Wilson
and
P.
W.
S.
Andrews, Oxford,
1951.
*
Oxford Studies
in
the
Price Mechanism,
op.
cit., page
11
3.
110
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