Price Behaviour of Firms

The determination of prices has played a central part in economic theory for a hundred years or more. It forms the core of micro-economics, and is often the first topic in economics that students are taught. Its role in the allocation of resources is stressed, and—more recently—its role in the process of inflation. Yet it has been, and remains, a subject of considerable controversy. The work of Sraffa [134], Chamberlin [22] and Joan Robinson [118], in the late 1920s and early 1930s, threw doubt on the validity of an analysis of price determination based on the assumption of perfect cornpetition. The famous article of Hall and Hitch [56] in 1939 questioned the applicability of even the new theories of imperfect competition to pricing in the real world, and sparked off a long controversy on how far businessmen act—explicitly and implicitly—in the way that economists appear to suggest that they do. The questions raised by this work led in several directions. On the one hand, they led to an examination of the effect of different kinds of market structure on competition and prices, with particular emphasis on oligopoly. On the other hand, they led to an examination of the internal workings of firms, and of the process of decision-making under conditions of uncertainty, including an examination of the meaning of maximising behaviour in these circumstances. In the course of this work the role of managers, rather than owners, was stressed.