I am now writing a paper (the second chapter of the book with the title The Microfoundations of Evolutionary Economics) and I want to collect more information on what I call Sraffa principle (or Sraffa's principle). See for example my paper “The Revival of Classical Theory of Values,” (2016) in the section "Price setting and its twinned behavior of firms."
However, as this is a very simple principle of firms' behavior, many other economists may have written about this principle or behavior when their product price is fixed. Do you know any papers or books which referred to it? In that case, please inform me those papers and books.
Thank you for your question, Prof. Yoshinori Shiozawa !
Unfortunately, I do not have any knowledge of your said behavioral principle.
Maybe you can search and find it in Google Scholar?
Kind regards,
Shanhai PAN
Hello Yoshinori, microeconomic behaviour of firms in conditions of fixed pricing is most often discussed under the headings related to discussion of the consequences of policies involving Price Control. Traditionally this begins with the idea of there being an 'equilibrium price' that the firm would like to offer and the relative position to that price that the exogenously fixed price is set at. This is classical simplistic 'Marshallian' analysis based on implicit assumptions of rationality.
However the behaviour of any one firms is the resultant of the aggregated pressures and opportunities that it's executive members perceive from the vantage points each of them occupy in relation to that firm and its commercial and geopolitical circumstances.
One cannot assume these things away under the assumption of exogenous irrelevance, nor under the assumption of a 'free market western democratic globally connected society with a strong infrastructure of physical and informational communications and a physically relocatable work force that is independent of counter-acting desires for community stationarity. and cohesion.
In 'Microfoundations' is defined only two of these attributes whereby an otherwise undifferentiated product is distinguished from another. These are 'location' and 'locomotion'. Extending this precedent of principle to your multi-attributional definition of what a product is then each firm's view of each of its products must be treated in the same way. For instance the different attributes of each of The 'target market's' whose demand aggregates into the total demand for that product in setting production quantities of it. Thus each of these numbers contributing to the production target of an individual firm differentiates that product into a set of individual product variants. The production behaviour of the firm for any specific product 'archetype' is thus the resultant of its individual assessments as to the demand for each of the sub-type products as defined by their commercial and geo-political attributes. These attributes, I emphasise, are susceptible to almost infinite deconstruction within and across societal boundaries and potentially down to the level of the individual. A concept which is well in tune with the mathematical template by which you are building your models and which is also entirely in tune with the micro-targeting of individual consumption patterns that is facilitated by intrusive social media and commercial intelligence gathering technologies which are now a reality in our still very anarchic communications infrastructures.
If you can accept this extension of concept, then deconstruction of the behaviour of the firm can be seamlessly extended into the body of behavioural literature upon which the whole of the marketing and product development profession relies and which is itself heavily segmented along geopolitical, commercial and cultural lines..
Dear Shanhai ,
thank you for the information. The fact that you know noting about the behavioral principle is quite encouraging. It is very simple but neglected so far. But I am thinking this is important for the under standing of how economy works.
If you encounter any similar expressions or contentions, please let me know.
Yoshinori
Dear Robin,
It's been a long time since we talked on ResearchGate. I understand now that my question was quite ambiguous. Because I have used the word "principle," maybe you have considered the deep background of firms' behavior. That must be very complicated.
Let me explain myself. I am thinking a very particular situation. Suppose a manager of a production workshop which makes a single product. The price of the product is fixed and determined by his or he superior. He or she has to decide everyday morning how much they should make. Suppose it is possible to change the volume of production every day. The manager knows the past data how much his or her product and has information of his product inventory. If possible, the manager wants to know today's shipment volume, but this is only possible by the past experience. Then what the he manager can do and would like to do is to keep his or her stock of product at the appropriate level. I expressed this behavior simply "they produce as much as they can sell."
This is a very specific behavior or reaction to the everyday changing demand. Even though, it seems to me the feasible and most often employed method to decide everyday production volume.
Have you experience of inventory control? Economists do not worry about these details. Theory of inventory control was intensively studied in 1950's but afterwards it became out of sight of many of economists.
The only one case of answers that I know for my question:
In his article "Dual Stability in a Cambridge-type Model" published 1977 in The Review of Economic Studies, 44(1): 143-151, Masahiko Aoki wrote two times as follow:
- In the short period, the firms produce as much as they can sell at fixed prices and they then revise these prices when a change in costs occurs. (p.143 in Introduction)
- The prices of commodities are chosen by firms at the beginning of each period in advance of production and at these prices firms produce as much as they can sell in the period. (p.144)
The production attitude that Aoki presupposes is practically the same as my Sraffa principle. I wonder whether there are many other assumptions or observations like this.
I came to know the existence of these phrases recently only by chance. Professor Aoki was my director of research when I was research assistant at Kyoto Institute of Economic Research, Kyoto University. I know existence of this paper from that time. But I have no idea that Sraffa principle was expressed in this paper. Perhaps you have read similar phrases but have forgotten them. If you recall something, give me your information.
Hi Yoshinori,
In the shipping industry and particularly in the dry bulk section of small to middle size ships the principle applies . Given a level of freight rate, they will produce in ton miles as much as they can. In other words the theoretical model of perfect competition seems to apply.
See for instance McConville, J. (1999). Economics of maritime transport. 1st ed. London: Witherby.
Dear Athanasios,
thank you for the information. Shipping industry is a kind of services. It cannot produce if the shipping request does not come. Then, I think the Sraffa principle is practically the unique solution for the industry. If you are running a regular service, you decide the freight rate and you wait the requests until the departure time. The exceptions would be the case in which the total requests exceeds the capacity of the ship. Another possibility would be the bulk sale. You may offer to transport a determined quantity of oil from point A to point B by your ship at a determined time. In such a case, it may be wiser to negotiate the price (freight rate) with a possible client than to leave your ship idle. Am I right?
As for the comment that "the theoretical model of perfect competition seems to apply," I have an objection. The negotiation case may be close to the theoretical model of perfect competition but the regular service case is in my understanding very far from the perfect competition model. Am I wrong?
Hi Yoshinori,
You are absolutely right! The model does not apply in the case of scheduled services (mainly containers). It is only relevant in the case of spot market for bulk cargoes that mainly include medium to small size bulk vessels (bulk carriers and tankers). The spot market regards a voyage based agreement following negotiations.
For a given market freight the owner as a price taker will try to maximise revenues and in order to achieve this will aim to maximise productivity. The ship's productivity depends on the speed and capacity utilisation. Putting aside speed, in order to maximise capacity utilisation one will need to have his ship full to capacity sailing as much time as possible. Thus for the given market price a shipowner in the spot market will try to "sell" as much service/product as possible.
Hope this helps.
Happy to provide more information on any of the above.
Best regards
thanasis
Athanasios and Yoshinori,
I conceptualize transportation as a component of the broader commodity of accessibility, which must be produced in any spatially extensive economy, and is subject to the same pricing principles as all commodities (adjusted to the material specificities of this sector). However, its special status, as an produced input to every other act of production and consumption, gives it a unique status that undermines both neoclassical and Marxian economic principles (see attached, but also my book with Barnes titled The Capitalist Space-Economy)
best wishes, Eric
Thank you, Eric.
Your are working on economic geography and I am mainly working on international trade theory. If we take into consideration the transportation cost, the two disciplines become very close to each other.
In my new theory of international values,
A New Construction of Ricardian Theory of International Values
http://link.springer.com/book/10.1007/978-981-10-0191-8
I have explained how to treat transportation cost. The introduction of transportation requires to distinguish the location of the commodity. In other words, commodity is specified by the material characteristics and the location. Please see Section 9 Transportation and Transaction Costs and Nontraded Goods.
Compatibility of production prices problem arises just as the same way as you have argued in your paper.
It is better to apply on the following models:
- 5P+5C
- PIMS
- LDC+HPV
Certainly one them or some combination among them will be fully helpful. Should I explain more please do not hesitate to contact me accordingly. Rgds
Thank you, Amir.
5P + 5C that you mentioned may be two sets of key words like
5P 5C
- Product ⇔ Customer Value
- Price ⇔ Cost to the Customer
- Promotion ⇔ Communication
- Place ⇔ Convenience
- People ⇔ Community
These are all important keywords in marketing.
What I am asking is a principle according to which firms decide how much it produces when one knows the series of demands from past up to present. I am asking a clear formulation. I am asking who had formulated it when and how.
Actually there's not any associated formula and even if there is, then I don't believe such an sophisticated formula. Kindly note that I principally mean as you mean.
5P+5C :
This model plays a role of "check list" as it shows the gap between the present situation and the proper position, in which you'll find the product-market matrix that shows, the future production needs market development and diversity.
PIMS :
Based on the researches of Harvard it can be said that your purpose depends on future marketing, product quality, sales power, bargaining. Also according to the Ansof's matrix it depends on the market penetration including market share, usage times and market development.
LDC+HPV :
Th model shows that your purpose depends on quality, services, delivery, packaging and convenience. Also your purpose depends on WACC, ROI and ROA.
Dear Amin,
Sraffa principle is not sophisticated at all. It simply means that
when the price of a product is fixed, firms produce as much as they can sell in the period.
This is the simple formula that all production managers are doing everyday. It is not known consciously only because standard economics focuses on price adjustment and assume that the demand and supply are equalized automatically.
What I want to know is the hidden history of this principle which must have been practiced since perhaps more than 100 years ago in assembly industry, in particular when the tact time is as small as or less than 10 minutes.
Masahiko Aoki wrote a paper in Japanese 1975 prior to the article in Review of Economic Studies 1977 and indicated that he had got hints from two papers:
(1) Chapter 2 "Underemployment equilibrium" of Axel Leijonhufvud' book On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory, 1969.
(2) Chapters 7 "Fixed price economy" of Morishima's Economic theory of Modern Society (in Japanese: Kindai Shakai no Keizai Riron, 1973)
I have checked two chapters but could not find a similar expression like Sraffa principle. Leijonhufvud and Morishima argued which of price and quantity adjustments is faster, but they did not formulated explicitly how firms behave when they have fixed their product price.
This is quite strange, because firms must have some rule of conduct to adjust their speed (i.e. quantity per period) of the production.
Masahiro Fujimoto kindly informed me that there is an English translation to Kindai Shakai no Keizai Riron, 1973. It was translated by D. W. Anthony and published as
Michio Morishima, The Economic theory of modern society, Cambridge University Press, 1975, Paperback edition 1976.
Thank you Yoshinori: I was not aware of this book but need to read it. On pricing: The one person I can think of is Frederick Lee.
Lee, F. S. (1985). "Full Cost Prices, Classical Price Theory, and Long Period Analysis: a Critical Evaluation." Metroeconomica 37: 199-219.
Lee, F. S. (1994). "From post-Keynesian to historical price theory, part I: facts, theory and empirically grounded pricing model." Review of Political Economy 6: 303-336.
Lee, F. S. (1998). Post Keynesian Price Theory. Cambridge, UK, Cambridge University Press.
Lee, F. S. (2007). "The Research Assessment Exercise, the state and the dominance of mainstream economics in British universities." Cambridge Journal of Economics 31(2): 309-325.
"Introduction to Modern Economics" Sep 1973 by Joan Robinson and John Eatwell
In chapter "5 Commodities and Prices" 5-4 "Manufactures"(153 page), they wrote
"The prices of manufactures are set by the producer....In a modern industrial economy，under-utilized capacity normally exists for almost every commodity，and stocks are held at several points along the line as goods pass through the stages of production and sale，so that supply can respond readily to changes in demand."
https://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Daps&field-keywords=an+introduction+to+modern+economics+robinson&rh=i%3Aaps%2Ck%3Aan+introduction+to+modern+economics+robinson
Sensei, you might want to look into Ronald Coase 1937 work. There's a recent mention of it in R Thaler's book, MisBehaving: The Making of Behavioural Economics. Very interesting read. There's some debunking of Coase's theory in terms of law and economics.
Thank you, Fujimoto.
I have read Robinson and Eatwell (1973). It was translated into Japanese by Hirofumi Uzawa. Ryutaro Komiya, a rival professor of Uzawa at the University of Tokyo wrote a monograph The Anatomy of Joan Robinson's Modern Economics: A Critical Commentary in defense of more orthodox strand of economics, although he had learned under W. Leontief. I was asked to write a book review of Komiya's book (1979).
As I was disappointed by Robinson and Eatwell (1973) itself and did not evaluate that it deserved a criticism in a form of a monograph, my review of the book was quite harsh.
I was disappointed by Robinson and Eatwell (1973) because their book was not theoretically radical at all. Perhaps I am looking the sentence cited by Fujimoto above more harshly than necessary, but it does not refer to the adjusting or regulating principle of production.
As an instant reaction to a new change of the demand, it is inevitable that a firm sell from the product stock. But what happens for the production. Doesn't the firm respond to the changes of demand? Why don't they consider the supply attitude of the producer firms. Once again, I am disappointed by their textbook. They are telling a common sense observations but not studying the economic processes in front of them.
Dear Eric,
thank you for suggesting Fredric Lee. I have his book Post Keynesian Price Theory (1998). I searched his book briefly but could not find any interesting comments. At your advice, I examined the book again and found a great point.
In chapter 6 of the book, Development in the doctrine of normal cost prices, there is a headline Sequential production through time. In a footnote (#4, p.125), Lee told about an interesting story how Gardiner C. Means came to get an idea of "sequential production."
I checked the Means (1962) Pricing Power and the Public Interest and found that Means had formulated the same principle as Sraffa's by the name of flow principle.
Let me cite tow parts:
[T]he industrial enterprise is likely to adopt quite a different principle for the control of production, one which might be called the "flow" principle. Once the individual enterprise has determined on its prices, it will hold these prices constant and vary the flow of output in the light of the demand at these prices, changing its prices only occasionally as conditions change so greatly as to exceed some threshold. (p.200)
{T]he flow of production is closely articulated to the sales by dealers. While forecasts of expected sale are made and give a basis for the general policy and or to adjustment seasonal norms, the actual rate of production is adjusted to actual sale by dealers. (p.202)
This is exactly what I was asking for. Lee remarks that this "flow principle" is a part of Means's definition of administered prices. This is quite reasonable because price setting must be accompanied by a kind of Sraffa principle at the quantity side of continued transactions.
I have to thank Eric again. If he had not made his comment, I will not be able to find this important fact in the history of economic theory.
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2 Recommendations
Masahiro Fujimoto
Fujimoto Financial Quantitative Reserch
Dear Shiozawa,
I think the authors supposed firms produce to respond the change in inventory with fixed price.
They admitted Sraffa principle in the sense firms adapt their production volume according to demand with fixed price.
You are right they didn't provide exact formula how firms choose production volume after the observations on sales volumes.
Do you include such adjustment process in the term Sraffa principle?
If so, probably you, M. Morioka and K. Taniguchis' works are a few challenges for that subject.
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Yoshinori Shiozawa
Osaka City University
Dear Fujimoto,
>Do you include such adjustment process in the term Sraffa principle?
Yes, as the production rate can be changed only at finite lapse of time, adjustment by product inventory is a necessary part of Sraffa principle. Professors Taniguchi and Morioka's works deserve a bigger attention. That is the reason why I am writing introductory two chapters before chapters by Morioka and Taniguchi. I believe the coming book will be an epoch-making one.
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1 Recommendation
Yoshinori Shiozawa
Osaka City University
Dear Maria Cristina,
I looked up Coase's paper The Nature of the Firm and found an interesting paragraph which is a citation from Arthur Slater:
Let us consider the description of the economic system given by Sir Arthur Slater. "The normal economic system works itself. For its current operation it is under no central control, it needs no central survey. Over the whole range of human activity and human need, supply is adjusted to demand, and production to consumption, by a process that is automatic, elastic and responsive."
Are you suggesting this part? There is a phrase like "supply is adjusted to demand."
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Maria Cristina Bautista
Ateneo de Manila University
I just thought that any 'evolutionary economics' book should have Ronald Coase who raised the question-- Why do firms exist? Answer: It is to reduce transactions cost in going to the market. As for the fixed costs, i think behavioralists (note: i do not think they were a group known as such then; Thaler's book is a fascinating first hand account on their start and the struggles they had with the Chicago school) started with only one assumption among the five conditions of a perfectly competitive market - freedom of entry and exit. This refers the contestable market school and their response to a similar question like yours -- What sunk costs? Baumol led his gang on contestable markets; the one on trade might be of interest to your other research.
here's a link to Coase's obituary..
.http://www.economist.com/news/leaders/21584985-anyone-who-cares-about-capitalism-and-economics-should-mourn-death-ronald-coase-man
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Yoshinori Shiozawa
Osaka City University
@Maria Cristina Bautista
Of course, firms are as ubiquitous as markets. the question "why firms exist?" is important. However, In chapter 1 of the book Microfoundations of Evolutionary Economics, which has the same title as the book, I concentrated on human behavior. The mainstream economics always assumes some kinds of infinite capability, either in collecting, processing and directing information. I wanted to find really possible human actions. It requires an examination of various aspects of our behaviors. That is why my first chapter becomes so long. A firm is composed of people and it is run by people. Thus, how people behaves is the problem to be settle before firm's behavior.
Please see Microfoundations of Evolutionary Economics
https://www.researchgate.net/publication/301766363_Microfoundations_of_Evolutionary_Economics
In chapter 2 of the book, which I am now writing, I am now inquiring how firms behave. My question in this question page is one of them. I want to get a concrete form of behavior, which describes majority of firms. Sraffa principle is a candidate of such behavior patterns.
Working Paper Microfoundations of Evolutionary Economics
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1 Recommendation
Marco Bertilorenzi
University of Padova
Dear Yoshinori,
I dare to suggest you a - I believe so - important study for your research question, i.e. Veblen's Engineers and the Price System (1921). I do not know if you have already considered it. The first three chapters, which were essays written during 1918 and 1919, all cope with the problem of fixing rate of outputs at profitable market prices, which is - according to Veblen's idea - the principle of the "conscientious withdrawal of efficiency". Veblen's central argument is (p.42) "When corporate organization and the consequent control of output came into bearing there were two lines of policy open to the management: a) to maintain profitable prices by limiting the output, and b) to maintain profits by lowering production costs of an increasing output. To some extent both of these lines were followed, but on the whole the former proved to be the more attractive; it involved less risk, and it required less acquaintance with the working process of industry". Business and finance backers (the "vetusted interest" claimed by Veblen) are, according to Veblen, aligned with this idea and they behaved the same way when they controlled a firm. In his mind, this state of things changed when engineers fuel the innovation process, reversing the set of possible choices (opting for reducing costs). Which is rather questionable such as an conclusion of course. I hope this could help, both options seem to be inputs to answering your question. Best, Marco
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2 Recommendations
Robin Edward Jarvis
Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA)
Dear Yoshinori,
..a small interjecting observation here from another discipline, if I may.
You have cited Salter, in Coase, as pointing out that "The normal economic system works itself... it is under no central control, it needs no central survey... supply is adjusted to demand, and production to consumption, by a process that is automatic, elastic and responsive."
You have also discussed in Ch.01 of your 'Microfoundations..' how Uexkhull's work in behavioural biology has led to a better understanding of animal behaviour, including our own. To recap in paraphrase, and slightly embellish, you have described how this semiotic approach, in which sensory inputs and a goal stimulate a 'best choice' output action that is selected by evaluating the current inputs and goal against a 'memory' of past behaviours and their outcomes, is nowadays also implemented in computer algorithms.
It should therefore come as no surprise that, if the behaviours of people in given circumstances, i.e. having existing conditions and goals, can be characterised as instances of types of computer algorithms, then the systems by which we organise our myriad economic tasks, and the evaluation of the behavioural 'rules' (algorithms) giving rise to them, are then very likely to be similar to those by which computer system hardware and operational management software organises the execution and completion of the myriad tasks demanded of it from moment to moment. The overall demands upon an individual computer management system are defined by many factors, besides its design capacity to be automatic, elastic and responsive to the ever changing volume and mix of goals and resource requirements of the independent tasks which comprise the transaction stream presented to it. The analogy to a business, factory, corporation, national economy or the global one is striking. The work being done, the demands being satisfied, the resources available to the processes invoked to achieve the stream of outputs expected are all described as 'Flows'.
Crucially, the analogy between the computing machine/system and that of a firm should not be pushed far without including the teams of real people constantly monitoring the machines operations, adjusting parameters, evolving capacities, forecasting transaction streams and adjusting the rules that implement its strategies. Just as is done within business and economic entities of whatever size.
But the essence of the basic processes/behaviours at work, at whatever level, remain fractal, as mentioned in your Ch.01, However, the Input-Process-Output model, if expressed as such, so simply, is completely misleading. Just like Ricardo's '2-nation 2-product' trade model it cannot be scaled without evolving its operational design.
The problems confronted and solved by computer operation system design, where 'the system' comprises equipment, control algorithms and human 'minders', already embody entities that are completely analogous to the elements of any business or economic structure. Some may be unfamiliar by name, but nearly all are familiar, to you or I, once their functional purpose is understood and the causes which give rise to the needs for their inclusion. You speak of Inventories and Warehouses, ICT can speak of Caches and Storage Devices. You speak of Supply Chains and Distribution Channels, ICT can speak of Channels, Busses and Backbones. The similarities can be drawn almost endlessly.
But in all of this notice one important point. The behaviours by which the efficacy of the whole is maintained in the face of its ever changing operational environment are under constant review by the system from within itself. And these are adaptive.... evolutionary if you like to describe them that way. Which is to say that the 'key' model of behaviour that you seek must be one which is itself not a fixed concept, unless that fixed concept is of a behaviours which is itself always evolving as a bio-feedback rule making process. Change in it would necessarily be intermittent and erratic, based on many factors and upon the triggering of various and changing behavioural thresholds.
The demands of mathematical representation, at this moment in time, may require great simplification of this reality. But I would argue that we would then just as well continue to erect a smokescreen of CGE outputs to hide this inconvenient truth from those of our masters that seek a stable and definitive view of man and our societies as an authoritative justification for our acquiescence in the perpetuation of the tenets of the status quo.
What we are trying to do in economics, using an ICT term, is to understand the Architectural principles around which our systems are built and by which they operate. Here is an introductory text: http://www.redbooks.ibm.com/redpapers/pdfs/redp5345.pdf
However, architectural principles while necessary they only talk of organisation, relationship and high-level 'rules'. Each instance of a computer Operating System managing and controlling a 'live' computer hardware system would be an example of business, with its factory, its offices, its personnel and all of the myriad pieces of equipment that they will use to process what comes in the factory gate into what goes out of it. Just as each factory implementation, of any given type, with the usual combination of hardware, management systems and human skills is only as unique as the business' goals and the set of people who give it life, so too are ICT systems.
The management systems of business vary around the world. They do not only differ because of the cultures and skills of their people but also because they can arise from different philosophies of business and from the different socio-political rules and goals that exist in their operating environments. So too do similar computer hardware 'platforms' combine with very different Operating Systems under the control and management of very different people.
So! Not only can we see that a specific product can be differentiated from another simply by its location at a moment in time, as shown in Ch01, so too can the economic behaviour of individual economic players, and even non-animate agents, be differentiated by characteristics specific to their locations in their local, regional and global environments ... and in historical and future time.
Perhaps I am not being very helpful, but at least I may have provided a sobering perspective on some of the issues that any durable theoretical foundation might be expected to accommodate.
It brings to mind the old adage.. and paraphrasing perhaps.. "The surest fruit of greater knowledge is a greater knowledge of how much more we still have to learn".
best regards, Rob
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2 Recommendations
Yoshinori Shiozawa
Osaka City University
Marco,
thank you very much. I did not imagine that Veblen had argued this kind of things. Even in Frederic S. Lee's book Post Keynesian Price Theory does not refer to this book.
Although I believe that policy b) is much more dominant since the second half of the 20th century, Veblen's explanation is indicative. I am still wondering why most of firms take the policy to fix the price. Veblen may give us a good hint.
Thanks again.
With highest respect,
Yoshinori
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Yoshinori Shiozawa
Osaka City University
Hi, Robin!
It seems we were writing our posts at the same time for the same question. I will respond to your post latter. I am now a bit tired.
Yoshinori
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1 Recommendation
Robin Edward Jarvis
Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA)
Dear Yoshinori, More to the point... Fixed pricing clearly has advantages for the management of risk. This can be argued is an increasingly important factor for larger businesses as they have grown in size and become more 'corporatised' with separation of shareholding from management. It also works for small businesses that are least likely to be able to diversify within the niches in which they tend to operate.
Here is a link to a relevant study of risk aversion and forward-price contracting by farmers in South Africa. It may be significant to note that the Vaalharts region is served by a considerable irrigation scheme, and thus may be regarded as relatively capital intensive (via the infrastructure involved) and hence as being more corporate in their management styles. The probable existence of farmer cooperatives are also likely to be a factor in the observed behaviours.
http://ageconsearch.umn.edu/bitstream/5970/2/47010102.pdf
Robin
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Robin Edward Jarvis
Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA)
More depth here: University of Southern California.. but from marketing perspective rather than economic theory: http://consumerpsychologist.com/intro_Pricing.html
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1 Recommendation
Yoshinori Shiozawa
Osaka City University
Robin,
you have inundated me with so much of information. Give me time to reflect on these.
Introduction to Marketing of the University of Southern California, that you have only indicated the chapter on Pricing may give me various hints. I will learn it.
As for the structural similarity of various entities which exist and work, there may be a deep reason that we do not know yet. I will also reflect on it but I am not sure if I can arrive at a good idea.
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1 Recommendation
Lawrence A. Boland
Simon Fraser University
Yoshinori,
Given the title of your book, I thought you might be interested in a chapter from my 2014 book on economic models that is about evolutionary economics. If you are interested, e-mail me at [email protected] and I will send you the chapter.
LB
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David L Hammes
University of Hawaiʻi at Hilo
Yoshinori: A blast from the past (1963), but perhaps relevant to your question: A Behavioral Theory of the Firm, Richard Cyert and James March.
I wonder how fruitful a fixed-price view of business is these days when almost costlessly a firm can continuously tailor a multitude of prices to a panoply of buyers by a wide variety of characteristics now identifiable by low-cost data-mining techniques?
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Yoshinori Shiozawa
Osaka City University
Dear David,
thank you for the information. I know the book and have read this and that parts. Is there any explicit expression on what I call Sraffa's principle?
As for the fruitfulness of fixed price, are you sure that firms are continuously changing their prices? Firms are able to change their prices. The real cost of changing prices is becoming cheaper and cheaper. Then, if they want, they can do. However, do they want t change their prices? If they do not, the simple facility of changing prices does not lead prices change.
It is true that the new Keynesians claimed that prices remain constant by the existence of "menu cost." If this is the unique or main reason why prices are sticky, your point would be important. However, I am thinking differently. Prices remain constant because there is no positive reason to change them.
Please do not confuse pricing behavior of modern industrial producers with owners of some rare items like Picaso or others.
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1 Recommendation
Lawrence A. Boland
Simon Fraser University
What I observe today is that many corporations will increase prices when demand goes down in order to benefit their stock holders. This is not what we teach about market competition.
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David L Hammes
University of Hawaiʻi at Hilo
Larry, that's interesting on several levels. "Price" (on an axis) looks to be a one-dimensional variable, but we all know there are many dimensions to a "price". So, I'll argue that "price" is hard to measure or observe. Secondly, why "today" do firms find it pleasing to stock-holders to raise price? Wouldn't this have been pleasing "yesterday". too? Privately-held firms' owners stand to benefit from increased prices, too. What limits this "pleasing" effect? So, I expect to see prices rising faster in markets where demand is falling than in markets where demand is rising? The world could be characterised by rising demand curves, I guess.
I guess I see the situation as one where firms are able to more perfectly price-discriminate. In which case, what is "the" price in our models?
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1 Recommendation
Yoshinori Shiozawa
Osaka City University
Lawrence and Davis,
are your arguments based on a firm fact or are they a result of simple speculation? How have you known that demand for a product of a cooperation went down? How have you estimated the cost of the product?
If the cost of production is going up, the price will normally go up even if the demand is decreasing. This is the simple consequence of full-cost principle.
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Lawrence A. Boland
Simon Fraser University
My view was based on observation and following business sites. I observed no increase in costs, just prices.
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Yoshinori Shiozawa
Osaka City University
> following business sites.
Have you forgotten to give the URL?
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Lawrence A. Boland
Simon Fraser University
There are many even in Canada.
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Robin Edward Jarvis
Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA)
Further to the contributions of Lawrence and David to this discussion, and Yoshinori's request for examples of 'variable fixed-pricing'. I suggest that you consider the recently announced practice in supermarkets to adopt shelf-edge digital pricing display technology, whereby the prices are varied hour by hour to accommodate the motivations and income demographic of customers making up the majority of the 'footfall' at different times of the day, day of the week, week of the year etc. TESCO, the UK's biggest supermarket and active internationally, has announced this month (Aug 2017) that it has begun it first pilots in the past few months.
It might now be appropriate to recall the long-time practice of casino's to track the activity of individual patron's through the chips issued to them, and where they are spent, to manage their gambling experience, in real time, to maximise the 'price' they pay for the gambling 'entertainment' value delivered to them.
Putting that practice together with TESCO's initiative with dynamic shelf-edge pricing it is conceivable that by identifying supermarket customers upon arrival through use of a loyalty card to unlock a trolley it will be possible for them to tailor the prices experienced by individual shoppers as they progress through the store, and to base this upon an accumulation of the current real-time acquisition of data-points integrated with historical shopping habit data-points held on file and further combined with socialmedia-inferred proclivities, enriched by Google-big data profiling of their wider lifestyle factors.
Where indeed does this leave what we teach in school about supply and demand?!!
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Lawrence A. Boland
Simon Fraser University
In other words, Robin, the prices are not based on production costs. Right?
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Yoshinori Shiozawa
Osaka City University
Thank you. Robin. I understand what is happening in Canada, UK and others. I do not know if this kind of trials are going on in Japan. The shelf-edge digital pricing would surely reduce the pricing cost (usually called "menu cost") substantial part of which was to change the price tags.
With this system, it is sure that supermarkets can price a higher price in the midnight where the cost of running the shop is high and price a lower price in the early afternoon when they can expect more clients at this time band. It may help averaging the sales flow in a day. This may also help to supermarkets to reduce the total running cost of the magazines.
As for the demand, I wonder if this kind of "sales promotion" will help to increase the total sales volume through time. The total effects may remain small.
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David L Hammes
University of Hawaiʻi at Hilo
I think it leaves us in the very short run, where supply is fixed and the firms with all this great information (we reveal), move us along our individual demand curves. Then, if we want to 'talk' supply and demand in the market we have an over-lay of 'tending towards the long-run' when we teach supply and demand in classes and the LR monopoly. comp. model--so, right, Larry, production costs and prices are different. If asked when the long-run comes we give 'em Keynes' quip and we tell them to learn how to haggle.
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Masahiro Fujimoto
Fujimoto Financial Quantitative Reserch
In my opinion, the examples Robin suggested are not proper examples for Shiozawa's concerns. I guess his subject is concerned with manufacturers' shipping prices.
I think manufacturers' shipping prices to TESCO do not vary hour by hour because manufacturers don't deliver TESCO hour by hour.
Probably TESCO decides the varying prices schedule based on the average manufacturers ' shipping price as average prices for customer keep the normal margin. Given the average prices, deciding the varying prices schedule around the average price is a problem of market segmentation. As advances in IT lower information acquisition costs, it is possible to break down the market and make optimum pricing in each segmented market.
However, this does not mean that the fluctuation in demand within each segmented market will change the price for that market. We should distinguish the fact that there is a difference in prices among segmented markets from the price change due to the demand change within each market.
The second case of a casino is not relevant to manufacturers' shipping prices.
By the way, I found news "Retail industry consultant criticises press reports of supermarkets introducing 'surge pricing' as 'fake news'".
https://www.computing.co.uk/ctg/news/3012655/tesco-sainsburys-and-morrisons-all-considering-electronic-shelf-edge-pricing-but-not-for-implementing-surge-pricing
Uber-style "Peak time" pricing where prices rise and fall according to demand is a phenomenon to accommodate the demand to fixed supply.
An empty car becomes "rotten" as unsold fresh food does.
So it does not contradict the Sraffas' principle, I think.
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