WHY DONT FIRMS IN TROUBLE RAISE PRICES? They should. But…. (Cross posted from

WHY DONT FIRMS IN TROUBLE RAISE PRICES? They should. But….

(Cross posted from reply on Econlog)

Firms rarely trade in commodities and benefit from the anonymity associated with commodities. They work in a network of established customers and distributors all of whom are more knowledgable about the relative strength of the firm in relation to its competitors than are members of the firm itself. (Yes, really.)

If your failure is an internal one ( a well known tech harware manufacturer had incentives to keep costs down which later nearly killed the company as venors started absndoning the paltform because it was too difficult to learn the many minor differences) then if your brand supports the price you can do it and use the money to correct the problem.

But the real problem is this: a very. Small number of people in any organization provide the entire marinally competitive difference, and if those people feel the company will fail they will leave. (We have pretty good data on this now. ). If knowledge of even short term failure leaks into the organization itself the consequences for quality, priductivity, retention, access to credit, will produce a deterministic result.

Firms do raise prices in duress. (Microsoft prior to Vista for example. ) I advise it all the time in order to prune unprofitable customers when companies are under duress. You just cant get away with it for that long.

Positivistic error/error of induction: assuming quantities contain sufficient information for other than commodities, when commodities are unique in this condition.