Price policy and price decision making in small companies

Abstract

The economic theory of the firm is still a very imprecise instrument for explaining and predicting decision making behaviours in a business organisation. This thesis examines the pricing aspects of this theory as they apply to small companies, those employing less than 250 people, and attempts to overcome some of the limitations of earlier investigations by restricting the sample to entrepreneurial type companies in two industries where there were a few large companies and a larger, but limited, number of small ones. An examination of the contextual framework of the companies revealed a marked difference in the age profile between firms visited in the display industry and those in the press metal working trade. This was due mainly to the nature of the activity involved and its historical background, and also to the influence of World War II on certain types of business activ:ty. There was also a significant difference in the owner-management relationship in firms in the two industries. From the decision making point of view, however, the survey revealed no marked difference between firms in the two industries and no significant deviation in either from the decision making characteristics embodied in the concept of the entrepreneur contained in the traditional theory of the firm. Objectives in small companies are rarely written and issued formally but it was, nevertheless, possible to identify three types of objectives used as the basis for decision making; these were the long term objectives, the rationalised objectives, and the dominant objectives. The evidence obtained suggests that most small companies were concerned in a general way with profit maximization and made a conscious effort to put this into effect wherever the opportunity presented itself. The majority of firms visited had a price policy of charging what the market would bear within the limits of their knowledge of the market and the customer. The pricing techniques, used varied considerably and ranged from a fairly simple historical costing approach to one involving complex forward budgeting calculations. The actual pricing decision did not always conform with the pricing policy of the company with the result that there was often a significant financial deviation from the budget. There was no evidence of any explicit understanding and use of the marginal analysis in academic terms. There was, however, some indication that many entrepreneurs had developed a cruder and more practical marginal approach which, under the circumstances, was appropriate and reasonably effective. Because of the imprecise nature of the information available the individual entrepreneur’s reaction to a particular market and output situation was often slow but, within the limits of his perceived knowledge it would appear that he did attempt to equate marginal order cost and marginal order revenue thereby achieving a rough optimum output level and, in a general way, profit maximization.