> >>> But this is the puzzle for neoclassical economics. If
> > you don't drop your price when costs fall, why don't I
> > drop mine to sell more quantity? And then you must
> > drop yours to compete. That's what the model predicts.
> >
> > jks
>
> I think that the correct explanation for this problem is the (perhaps
> Post-) Keynesian one; the decision to cut prices in response
> to falling
> costs is not symmetrical with the decision to raise prices in
> response to
> rising costs, when one takes into account uncertainty and time.
>
> Consider the immediate financial impact of a price rise
> versus a price cut.
> Unless you are in an unusual market or dealing in an unusual good, the
> immediate effect of a price rise is higher revenue, while the
> immediate
> impact of a price cut is lower revenue. Even if you expect the lower
> revenue to be compensated by lower costs, you have to finance the
> transition to lower prices (known in the business school literature as
> "margin investment in market share"). There is no such
> period of lower
> revenues in anticipation of lower costs when you raise prices; that
> actually gives you an upfront positive cashflow.
>
> So, the point is that cutting prices is an investment
> decision that needs
> to be financed while raising them is not. The fundamental
> asymmetry here
> suggests that you will raise prices any time you think it is,
> on balance,
> the best thing to do, while you will only cut prices when you
> are sure that
> you have to.
Thanks, that's a help for me. Still, I have a question.
Doesn't raising prices have a cost too of lost customers?
Consider canned soups.
There are numerous consumer products I just stopped buying once they hit a threshold I refuse to pay. I have never gone back to them.
I can't be the only one. Or, am I?
-- John K. Taber
--- Outgoing mail is certified Virus Free. Checked by AVG anti-virus system (http://www.grisoft.com). Version: 6.0.431 / Virus Database: 242 - Release Date: 12/17/02