Early Career

The OERG was the formative influence on Andrews' economic thinking (see Lee 1981, 1991). Its long and detailed interviews with prominent industrial­ists led to the publication of a series of studies, including several by Andrews himself (see Andrews 1937, 1940; Meade and Andrews 1938).

Andrews devoted the remainder of his career to developing a theory of the firm that would be consistent with the evidence that the OERG had uncov­ered, and by 1949 he began to publish the elements of his new theory of competitive oligopoly pricing. In an article in the local journal, Oxford Economic Papers, Andrews began by criticising ‘such economists as Kalecki. They think in terms of monopoly where I think in terms of competition, and I do not see the gross profit margin as a simple index of monopoly power' (Andrews 1949b: 54). Much of the article is devoted to the theory of costs, with Andrews drawing on the work of the OERG to deny the orthodox belief that both short- and long-run cost curves are U-shaped. On the contrary, he maintained, average direct costs of production tend to be constant over a wide range of output so that (with average fixed costs falling continuously) the average total cost curve is downward-sloping at all relevant levels of output. Since firms tend to keep some reserve capacity to deal with unexpected emer­gencies, they rarely operate at a high enough level of output for average direct costs to rise significantly.

In dealing with costs in the long run, when the level of plant capacity is variable, Andrews distinguishes technical from managerial costs. Average technical costs will be constant since the firm can simply add more and more identical manufacturing capacity (more factories, with more machines). Any tendency for long-run average costs to rise must therefore come from the sup­posedly rising costs of management, which Andrews denies. The firm adapts to the problems posed by increased output through the adoption of different techniques of management (his term is ‘levels of management'), giving a roughly horizontal long-run average total cost curve (ibid.: 75).

This explains what Andrews terms the ‘normal-cost principle' of pricing. As the OERG had discovered, firms set prices by adding to their average direct costs a gross profit margin designed to cover overhead costs and provide the desired net profit at the expected level of output. Abnormal or temporary increases in costs (e.g. overtime payments) do not lead to increased prices; neither do prices fluctuate in response to changes in demand. For Andrews, the rationale for normal-cost pricing is as follows: Business people think in terms of long-run rather than short-run profits. Even in oligopolistic markets, they believe themselves to be operating in an intensely competitive environ­ment, in which the entry of new producers from other industries is a constant menace. The threat of ‘cross-entry', as Andrews would later term it, keeps prices down so that ‘the tide of competition may leave little pools of abnormal profits behind it, but in the end, they tend to disappear' (ibid.: 88).

This was the clearest statement of Andrews' thinking on the theory of price in competitive oligopoly that he ever published. Nonetheless, it leaves a lot to be desired (see King 1988: 193-194). Important parts of his argument are confined to footnotes, with less significant issues occupying excessive space in the main body of the text. This is true in particular of Andrews' criticisms of earlier contributors to the academic debate on pricing under oligopoly, which are not at all systematic or comprehensive. The article itself seems not to have been widely read; it brought no published critical comments by other price theorists, from Oxford or elsewhere.

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