Oxford Economist: OERG and Hall and Hitch
The history and output of the Oxford Economists' Research Group (OERG) has been dealt with in detail (see Young and Lee 1993: 128-136), and thus will not be surveyed here. Rather, we focus on one of its most influential and controversial products, which was the paper written by Hall and Hitch entitled “Price Theory and Business Behaviour”, published in Oxford Economic Papers in May 1939.
The paper was based upon a detailed questionnaire and in-depth interviews with what today would be called a “purposive sample” of 38 “entrepreneurs”. This sample was made up of ‘33 manufacturers...3 retailers and 2 builders' (Hall and Hitch 1939: 13). Preliminary results of the survey and the “full-cost pricing” principle developed by members of the OERG were earlier presented in papers by Roy Harrod and Hall in 1937 and 1938 respectively at the Economics Section of the British Association (see ibid.: 12).The results of the Oxford survey appeared to conflict with the received doctrines of the time, marginalism and imperfect competition alike. As noted above, Hall and Hitch used the questionnaire method and gathered an “unrepresentative” sample of 38 firms. They had found that a high proportion of firms set prices using a full cost method. In other words, the firm would estimate average costs ex ante, as determined by its notion of “normal” output, and then add to it a percentage margin (the “mark-up”).
Hall and Hitch did not consider how margins could vary according to demand. They asserted that the pricing mechanism they proposed was a rule of thumb, which could only result, by accident, in maximum profit. Their approach thus went against both the received marginalist theory of the firm, and the “new” theory of imperfect competition. Hall and Hitch justified their full-cost pricing model based on the view that producers did not know their demand or marginal revenue curves (see Hall and Hitch 1939: 18-19).
In other words, they not only disregarded existing theory, but they set out an alternative model of industrial pricing.In the process of explaining their model, they used a kinked demand curve, introduced independently by Sweezy (1939). This curve illustrated a quirk exhibited by oligopolistic markets, that is, an increase in one firm's price would not be followed by its competitors, but by a fall in demand for the output of the price-cutting firm. On the other hand, a price decrease would be followed by competitors, resulting in a limited rise in demand. Thus, the demand curve facing the firm in an oligopolistic market exhibits a kink at the prevailing market price. This could then be used to account for price rigidity in oligopolistic markets. Indeed, it was proposed as a possible solution to the conundrum—falling output rather than falling prices—that characterised some sections of the economy in the 1930s (see Hall and Hitch 1939: 22-28; Efroymson 1943: 102-103).
What is also important to recall here is that the paper was reprinted in 1951 in the volume Oxford Studies in the Price Mechanism, edited by Tom Wilson and Philip Andrews (see Hall and Hitch 1951), and in the view of at least one observer, catalysed, along with other critiques of the theory of the firm, Milton Friedman's famous 1953 essay on “positive” economics. According to this view (Moss 1984: 314-315; italics in original), Friedman's essay was clearly intended as a ‘reply to Hall and Hitch (1951). ■.and others who attacked the theory of the firm for having demonstrably unrealistic assumptions'.
The 1939 version of Hall and Hitch with its full-cost pricing principle and critique of both ‘current doctrine of the equilibrium of the firm' and monopolistic competition approaches (Hall and Hitch 1939: 14-17) was the focus of some support, but mostly severe criticism from mainstream economists in the American Economic Review and the Journal of Political Economy in the postwar period.
While their views were supported by Lester (1946) and Gordon (1948), the theory, methodology and conclusions of Hall and Hitch were attacked by Machlup (1946) and Stigler (1947).Edward Chamberlin replied to the critique of Hall and Hitch in his note “‘Full Cost' and Monopolistic Competition” in the Economic Journal (1952). In this, he sets out what he saw as ‘the relation of the full-cost principle to the theories of imperfect and monopolistic competition' by reference to ‘Hall and Hitch in whose well-known article the principle of setting prices in accord with full cost is...presented in sharp contrast to “current doctrine” including specifically my own work [Monopolistic Competition] (Chamberlin 1952: 318). He went on to say (ibid.: 319):
It seems to have been overlooked by all concerned that the principle in question, far from being at odds with the theory of monopolistic competition, has been from the first an integral part of it. Unless I have badly misunderstood the principle, it is clearly (if briefly) described and contrasted with the principle of maximum profits...and is the basis, together with several closely related factors such as custom, traditional mark-ups, etc. (also oligopolistic influences), of my analysis of the important phenomenon of excess capacity. In so far as the full cost principle is an acceptable part of price theory there is no difficulty whatever about assimilating it into a system of monopolistic competition—it is, in fact, a further development of the theory.
However, as will be seen below, Hall rejected Chamberlin's position (see Hall 1970: 4-5).
In 1946, after his return to Oxford, Hall reviewed a book by George Katona on price controls and business in the US for the Economic Journal. As it was based on a survey and interviews—similar to the methodology used by the OERG and Hall and Hitch—Hall reviewed it very positively (see Hall 1946).
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