The Marginalist Defence. by Fred.
ARGUMENT AGAINST MARGINALISM
The discussion on price theory during the first half of the 20th century that would later be known under the term “full-cost controversy” had its debut with the publication of the aforementioned article by the Oxford-based economists Hall and Hitch (1939). In their work, entitled “Price Theory and Business Behaviour”, they presented the results of a survey accompanied by interviews among 38 firms, of which 33 were in the manufacturing business. The large majority of the firms were found to set their price in the following way: first, an ex-ante estimate of average costs was derived. On this cost base, two percentage margins were added to arrive at the final price. The first was a mark-up to cover overhead costs which could not be directly attributed to products; the second had the function of a profit margin. The authors called this “full-cost pricing” and insisted that it was a “rule of thumb”, which could only lead to profit-maximizing prices in the neoclassical sense by accident (Hall and Hitch, 1939, p. 113). Furthermore, they asserted that managers did not make any implicit or explicit attempt to estimate demand elasticities or other factors that would reflect the demand situation for the price setting process. Additionally, they included sunk costs (in the form of fixed overheads) into the pricing decision and were reluctant to alter prices if market conditions changed. All these answers Hall and Hitch received from managers seemed - at least at first glance - to be at odds with the postulates of the predominant economic doctrine, namely that prices are determined optimally so as to equate marginal costs and marginal revenues and thus to maximize profits.
The results obtained through their survey motivated the authors to develop their own explanation of the price-setting process, the “kinked demand curve”. This theory assumed that firms were, with their current price-quantity combination, situated at a kink on their firm-specific
The discussion on price theory during the first half of the 20th century that would later be known under the term “full-cost controversy” had its debut with the publication of the aforementioned article by the Oxford-based economists Hall and Hitch (1939). In their work, entitled “Price Theory and Business Behaviour”, they presented the results of a survey accompanied by interviews among 38 firms, of which 33 were in the manufacturing business. The large majority of the firms were found to set their price in the following way: first, an ex-ante estimate of average costs was derived. On this cost base, two percentage margins were added to arrive at the final price. The first was a mark-up to cover overhead costs which could not be directly attributed to products; the second had the function of a profit margin. The authors called this “full-cost pricing” and insisted that it was a “rule of thumb”, which could only lead to profit-maximizing prices in the neoclassical sense by accident (Hall and Hitch, 1939, p. 113). Furthermore, they asserted that managers did not make any implicit or explicit attempt to estimate demand elasticities or other factors that would reflect the demand situation for the price setting process. Additionally, they included sunk costs (in the form of fixed overheads) into the pricing decision and were reluctant to alter prices if market conditions changed. All these answers Hall and Hitch received from managers seemed - at least at first glance - to be at odds with the postulates of the predominant economic doctrine, namely that prices are determined optimally so as to equate marginal costs and marginal revenues and thus to maximize profits.
The results obtained through their survey motivated the authors to develop their own explanation of the price-setting process, the “kinked demand curve”. This theory assumed that firms were, with their current price-quantity combination, situated at a kink on their firm-specific