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This paper calls into question the conventional view of price determination in economics, showing that actual prices are typically set as a markup on normal costs, with infrequent adjustments, as posited by post-Keynesian theory.
Conventional economic theory assumes a Walrasian pricing mechanism that is known to pose theoretical difficulties. Less well-known is that conventional price theory conflicts with empirical studies of price-setting in industrial firms. Post-Keynesian theory, which assumes mark-up pricing on normal costs and infrequent price changes, is consistent with observation.
This paper shows that post-Keynesian pricing, unlike conventional pricing, features stable dynamics. The analysis focus on the short run, because post-Keynesian theory posits complex and historically contingent long-term price dynamics. Specifically, the paper shows that under very general conditions, prices converge to a unique equilibrium price vector.
Read the article (external link to journal)
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