The American Economic Review December 1968 Part 1 [antikvár]

The American Economic Review Volume LVIII DECEMBER 1968 Number 5, Part 1 THE PRICE EQUATION By Otto Eckstein and Gary Fromm* Prices have occupied the center of the stage of economics for most of the last century. Yet they remain among the emptier boxes of econometrics. Studies started in the 1920s, seeking to measure supply and demand curves, foundered on the identification problem. Thereafter, econometricians were preoccupied with other matters. Recently, Wilson [22], Kuh [12], Klein and Ball [11], Fromm [9], Schultze [20] and others started a new line of research on prices, seeking to explain changes in sectoral price indexes through cost and demand factors.1 The present paper presents some new, statistical results for U. S. manufacturing prices. The equations test the two dominant micro theories of pricing: (1) the supply-demand, competitive mechanism; and (2) the target return, full cost, oligopolistic pricing mechanism. They also provide first approximations for the lag structures of demand and cost factors on price, test for asymmetries in pricing, and serve as a framework for a historical review of recent inflations. The equations are fitted to quarterly price indexes for all manufacturing, and for durables and nondurables. The study is part of a program to build a complete model of the price-wage-productivity-cost structure of U.S. industries. I. Theory of Price: Supply and Demand In the classic, competitive market, price responds to the difference between demand and supply. In the limiting case, supply and demand stay in continuous balance through instantaneous price changes. Continuous clearing is an efficient market mechanism only in certain * The authors are professor of economics, Harvard University, and senior fellow, The Brookings Institution. This paper was prepared while the former was a fellow of the Center for Advanced Studies in the Behavioral Sciences. The research was partially supported by grants from the National Science Foundation to Harvard University and to the Brookings Econometric Model project. We are grateful to James A. Craig, Michael D. McCarthy, Michael Hicks and Nancy Bower for skillful aid in preparing this paper. We also thank Stanley Black, Robert Dorfman, Marc Nerlove, Lester D. Taylor, and Thomas A. Wilson for helpful comments. 1 Other studies include Dow [6],Conrad [4], Levinson [13 ], our earlier paper on steel prices [8], Yordon [24], Neild [15], Perry [16], and Bodkin [2],