Re Steve K's [5482]: I agree that the (neo-) neo-classical models of perfect competition and pure monopoly should be rejected (for a whole host of reasons). However, I continue to think that even after those models are abandoned, concepts including the price elasticity of demand and the income elasticity of demand are useful in comprehending pricing decisions in oligopolistic markets. The degree to which the firm strategy of product differentiation has been successful in creating brand loyalty allows oligopolies to set prices in a more arbitrary manner than would be the case in less concentrated markets (here we do not have to assume PC to compare oligopolistic markets to more competitive markets in e.g. the Smithian sense). In other words, the success of firm product differentiation strategy allows firms to mark-up the market price over the value of the commodity produced. Although there is thus somewhat arbitrary price setting by oligopolies (and there are lots of non neo-classical models that offer formulas for oligopolistic price determination, e.g. by Eichner and Sylos-Labini), there are LIMITS on the extent to which oligopolies can mark-up prices over value. One can observe that these limits do in fact exist if one considers the price and income elasticities of demand. E.g. let's say that it costs Nike $3 to produce a pair of sneakers and that they then sell those sneakers in the marketplace for $170. It would seem that there is then an inelastic demand curve for Nike sneakers. This is not really the case, though. E.g. if they offered those same sneakers for sale for $1,000 then I believe demand would decrease. It thus only appears that there is a rigidly inelastic demand curve for these sneakers and that for consumers the "sky is the limit" in terms of price. This is an illusion, though. Relatedly, if the income of working-class consumers goes down far enough and the commodity was produced for sale to the working-class, then the income elasticity of demand would suggest rightly that there can be expected to be a decrease in demand for that commodity. Of course, the above by no means exhausts this subject. E.g. the extent to which firms can increase price over value is also related to whether there are substitute goods that can be purchased by consumers. For some goods, often including utilities and energy, there are few if any substitutes (although huge price increases by oligopolies in these branches can stimulate research on alternative goods that can then become available in the future). For others, there are substitutes. E.g. Planter's Peanuts is a well-established brand. This doesn't mean, though, that they can charge _any_ price for their nuts because consumers can purchase substitutes (e.g. "no-name" generic peanuts). So, I think that some of the concepts associated with elasticity are useful in comprehending the limits to which oligopolies can mark-up the prices of commodities. And, it should be remembered that oligopolies have different degrees of monopoly power depending on the market, the nature of the commodity produced (e.g. is it a 'necessity'?), and the availability of substitutes. These concepts can be used, along with the concepts associated with product differentiation and oligopoly pricing, to help establish a *range* of prices in which oligopolies are able to price their output. In solidarity, Jerry
This archive was generated by hypermail 2b30 : Sat Jun 02 2001 - 00:00:06 EDT