Pricing decisions and the neoclassical theory of the firm

Abstract Many accountants seem to have accepted the existence of a ‘reality gap’ between management accounting’s conventional wisdom, based on the neoclassical economic theory of the firm and actual business practice. Whilst the former recommends the use of a decision relevant cost approach to pricing decisions, the latter is believed to be dominated by a full cost plus approach to pricing. In accepting the existence of a reality gap, accountants do not seem to have addressed the arguments of economists. These arguments seriously undermine the research findings of accountants that have given rise to the belief in such a gap. On the other hand, the empirical evidence supporting neoclassical price theory is not strong and much of the research that generated it is methodologically flawed. This paper evaluates the research supporting the accountants’ and economists’ respective positions and argues that neither is strongly supported by the conflicting empirical evidence. It then identifies the issues that need to be resolved by future research intended to assess whether empirical evidence supports neoclassical price theory or (full) cost plus pricing.

[1]  Christopher A. Martin.  Price Formation in an Open Economy: Theory and Evidence for the United Kingdom, 1951–1991 , 1997 .

[2]  Thomas H. Johnson,et al.  Relevance Lost: The Rise and Fall of Management Accounting , 1987 .

[3]  M. Friedman.  Essays in Positive Economics , 1954 .

[4]  J. R. Commons.  Legal foundation of capitalism , 1959 .

[5]  Lawrence A. Gordon,et al.  The Pricing Decision , 1982 .

[6]  Peter Secord.  Management Accounting (2Nd Ed.) , 1997 .

[7]  W. Nordhaus,et al.  Pricing in the Trade Cycle , 1972 .

[8]  Mirghani N. Ahmed,et al.  Cost allocation in Britain: towards an institutional analysis , 2000 .

[9]  Jean-Paul Chavas,et al.  Applied Production Analysis: A Dual Approach , 1988 .

[10]  Frederic S. Lee.  From post-Keynesian to historical price theory, part I: facts, theory and empirically grounded pricing model ∗ , 1994 .

[11]  B. Mccallum.  The Effect of Demand on Prices in British Manufacturing: Another View , 1970 .

[12]  J. Bright,et al.  The deployment of costing techniques and practices: a UK study , 1992 .

[13]  G. Hodgson.  The Approach of Institutional Economics , 1998 .

[14]  Robert W. Scapens,et al.  Never mind the gap: towards an institutional perspective on management accounting practice , 1994 .

[15]  Thorstein Veblen,et al.  The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions , 2000 .

[16]  Colin Drury,et al.  A survey of management accounting practices in UK manufacturing companies , 1993 .

[17]  Catherine C. Langlois.  Markup Pricing versus Marginalism: A Controversy Revisited , 1989 .

[18]  G. Archibald,et al.  Pricing and employment in the trade cycle , 1963 .

[19]  William D. Nordhaus,et al.  Industrial Pricing in the United Kingdom , 1978 .

[20]  M. Bromwich,et al.  Activity Based Costing Systems and Incremental Costs , 1999 .

[21]  C. Drury.  Management and Cost Accounting , 1988 .

[22]  C. Drury.  Accounting information for pricing decisions , 1992 .

[23]  S. Winter,et al.  An evolutionary theory of economic change , 1983 .

[24]  Gordon Shillinglaw,et al.  The Concept Of Attributable Cost , 1963 .

[25]  P. A. Losty,et al.  A Behavioural Theory of the Firm , 1965 .

[26]  Paul A. Samuelson,et al.  The Collected Scientific Papers of Paul A. Samuelson , 1970 .

[27]  Repercussion studies at Oslo , 1949 .

[28]  Robert W. Scapens,et al.  Management accounting research and practice , 1983 .

[29]  F. Rushdy,et al.  The Effect of Demand on Prices in British Manufacturing Industry , 1967 .

[30]  T. Hutchison.  Testing Economic Assumptions: A Comment , 1966, Journal of Political Economy.

[31]  D. Lambert,et al.  The distribution channels decision : a study carried out on behalf of the National Association of Accountants, New York, N.Y. and the Society of Management Accountants of Canada, Hamilton, Ontario, Canada , 1978 .

[32]  D. Hague.  Pricing in business , 1971 .

[33]  Eric W. Noreen,et al.  Conditions Under Which Activity-Based Cost Systems Provide Relevant Costs , 2005 .

[34]  R. L. Hall,et al.  PRICE THEORY AND BUSINESS BEHAVIOUR , 1939 .

[35]  T. Lawson.  The Nature of Post Keynesianism and Its Links to Other Traditions: A Realist Perspective , 1994 .