Price Setting - by Truman F Bewley (Hardcover)

Book Synopsis

The prices of some products fluctuate dramatically, while others remain more constant. What accounts for these extreme differences?

Renowned economist Truman F. Bewley investigates and elucidates this puzzling problem. Its crux, he argues, is that differentiated product prices are usually stable, whereas the prices of undifferentiated products - for which buyers can easily find comparable substitutes - are often volatile. Although product differentiation gives producers market power, this power alone does not guarantee price stability. There are nearly undifferentiated products whose producers have market power yet for which prices are unstable. Weakness of product differentiation makes it so advantageous for producers to compete on price that they do so and forego the benefits and stability of price collusion. Producers of truly differentiated goods prefer to compete on product performance rather than price and find that reducing prices during recessions does little to increase demand.

Based on hundreds of interviews with businesspeople responsible for setting prices, Bewley's book is an unusual and groundbreaking work, with findings vital for economists, students, and policymakers.

Review Quotes

"Truman Bewley has a unique interview skill in drawing out the thought process that important, if unsung, economic decision makers go through on a regular basis. His results ought to change our thinking about central economic policy issues, notably about the management of inflation and recessions."
Robert J. Shiller, Sterling Professor Emeritus of Economics at Yale University, and author of Irrational Exuberance

"How prices respond to the business cycle - and why they often don't - is one of the enduring mysteries of economics. In Price Setting, the eminent scholar Truman Bewley tackles the question with the simple but powerful method of asking businesspeople why they do what they do. The result is a must-read for anyone who wants to understand the economy."
N. Gregory Mankiw, Harvard University, and author of Macroeconomics and Principles of Economics

"Bewley has patiently asked hundreds of company managers how they operate when setting prices, and has skillfully summarized their responses in terms that make sense to an economist. The result is a set of new and important insights into how a modern economy actually works."
Peter Howitt, Brown University

"Truman Bewley has made foundational contributions to decision theory under uncertainty, the general equilibrium model with incomplete markets, and pure monetary theory. This remarkable new book shows Bewley's versatility and openness to new methods. Based on painstaking interviews with executives, the book is full of new evidence, findings, and ideas about determinants of time series properties of nominal prices for various types of commodities. Bewley's approach deserves to be applied to the study price setting during other episodes, and in other countries experiencing diverse rates of price level inflations."
Thomas Sargent, New York University