Let us now turn to price competition and examine various pricing techniques that are found in actual markets. Here the impersonal forces of demand and supply are modified by numerous considerations that run counter to the theory of competitive pricing. Market imperfections are plentiful. Sellers often select a particular price and quote it, allowing adjustments to take place in demand. The free market concept underlying pricing diminishes in importance. Accordingly, the entrepreneur soon is confronted with the formulation of a price policy.
 The price charged by a particular firm represents the culmination of much thought and effort of many people. Decisions must be made on numerous issues, such as the timing of a price change or the advisability of any discriminatory pricing. Price and production policies no longer are the sole results of impersonal market forces. To be sure, costs cannot be overlooked, but it becomes almost impossible for a businessman to calculate his costs accurately enough for him to determine an exact price. Estimates and averages cover up numerous mistakes. Then, too, institutional factors, custom, and inertia may exert considerable influence on price policies.
Administered Prices
Considerable attention has been given recently to the subject of administered prices and the distinction between them and market prices. An administered price is one set (through administrative managerial decision) by the producer for the product, with the intention of letting that price determine the quantity that will be bought in the market rather than of adjusting the price in line with output. Superficially, it appears that the price of automobiles, refrigerators, and a host of goods are announced to the public, on a takeit-or-leave-it basis without reference to demand. But the term has been misused and frequently misinterpreted. To begin with, an unfortunate connotation arises from the dichotomy of administered and market prices. The implication is that the former are not the result of the interplay of market forces. This, we have seen already, is not only a fallacy but an impossibility, since all prices require a market. Demand and supply exert their influence in every instance of pricing. No price can exist unless the various market forces of demand and supply interact. All prices, accordingly, are market prices.
What is well known, however, is that in the price-determining process, the forces of demand and supply are not always of equal importance. Whenever either the buyer or the seller can exert an influence on price out of proportion to the other, then an administered price prevails. Thus it can be stated that all prices are market prices, but that some are more representative of more or less administered influences than are others. Where the impersonal forces of demand and supply are in complete control, the degree of administration is reduced to a minimum. In such markets, changes in prices are the result of changes in the market structure of demand and supply and are not associated with the actions of a dominant buyer or seller.
An administered price lies between the automatic price that is arrived at through the free interplay of demand and supply and the authoritarian price dictated by a central authority with little or no regard for market forces. The area between these two types of prices--the area of administered prices--is a very broad one in fact. Backman throws light on just how broad it is when his study of the wholesale price index used by the Bureau of Labor Statistics disclosed that over 89 per cent of the prices represented therein fell into the administered category.
Administered prices are not characteristic of industrial markets only. Most retail prices are administered. Factor prices--wages, interest, and rents--typically are administered and, frequently, are set for long periods of time. Indeed, almost all American enterprise engages more or less in price administration. Since the administrator of a price, whether it be an individual, a firm, or a group, must consider certain market forces and since the administrator undoubtedly has some degree of price power, the crux of the matter lies in the degree to which the market forces are considered and the degree of power that can be exerted by the administrator. Of particular importance in this sequence is the nature of demand, which will determine the volume of goods that can be sold at the administered price. If the demand is relatively elastic, or sensitive to price, then the power of the administrator will be more limited, and vice versa.
The relationship between administered prices and price flexibility is another important issue. The flexibility or inflexibility of prices is measured by the degree to which they respond to market forces that are responsible for price changes. Certainly, we have both flexible and inflexible administered prices. There is no necessary relationship that requires inflexibility to be a basic characteristic of administered prices. There are many administered prices that have fluctuated more sharply than the general price level, and vice versa. Price inflexibility, however, does show that the firm has sufficient power to set price; also, the power increases as the degree of inelasticity of demand for the product increases.
Other fallacies that are current in connection with administered pricing should be mentioned. To begin with, administered prices are not synonymous with monopoly prices. As we discussed earlier, this erroneous assumption arises from the belief that pure competition is the only kind of competition. Administered pricing has been accused of lessening competition. But over-all, we find that the effects on competition vary considerably. What we have more generally is the competition between oligopolists which, we have seen, may be quite severe. Administered prices need not result in higher prices, either. The price sought by an individual seller is the result of his estimates of demand elasticity and his attempt to maximize his net revenue. How can prices rise in the face of declining demand and excess capacity? The answer rests in the maximization of net revenue, especially in the face of a relatively inelastic demand curve for the product, which might dictate reduced sales at higher prices.
Actually, the practice of administrative pricing is an old one and an integral part of our society; its use only generates undesirable repercussions when the practice is abused. The problem is not so much whether or not a price is administered, but how it is administered. Is it flexible? Who benefits from the administered price result? In considering the repercussions of a particular administered price, the following question should be asked: Is the degree of demand elasticity and the degree of the price administrator's control so great that the two, when combined, exert such a monopoly power over price that they impede market forces and/or contribute significantly to an unstable economy? It is only when this question is answered that public policy toward such pricing can be devised intelligently and rationally.
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