Keen Prices

Dear Sami Assalamo Alaikum

When Ismail Saglam and I did some research on the aggregate supply curve for an industry, we found that the standard accounts in conventional textbooks are fundamentally wrong. It is impossible for the supply curve to not interact with demand, and the ceteris paribus assumptions made simply cannot hold. It is logically impossible for them to hold.

This means that there is a shining opportunity for a new theory of the firm. I think that an ACE based theory would be able provide deeper insights. Firms follow simple rules for setting prices, based on information available to them. Environment is complex. Developing a suitable theory could potentially be a very significant contribution.

The attached paper by Keen Standish does in fact do something like this using simulations. I think there is room to do a lot more in this direction. My own programming skills are now obsolete, so I was hoping that we could collaborate in working out something along these lines.

with best regards

Asad Zaman

PS:

Keen has proposed his own theory of how firms price products. As he shows, it is logically and mathematically impossible for the firms to believe that their additional output will not impact on market prices -- this means that the perfect competition assumptions made to derive market supply curves are not valid. He provides an alternative -- "Keen" prices --- and shows that convergence can occur to these prices using a simple mechanism, where firms change prices in directions of increasing profits. This idea can be explored much more seriously and deeply using ACE models.