What do you think?
Rate this book
Price Setting
The prices of some products fluctuate dramatically, while others remain more constant. What accounts for these extreme differences?
Renowned economist Truman F. Bewley investigates and elucidates this puzzling problem. Its crux, he argues, is that differentiated product prices are usually stable, whereas the prices of undifferentiated products – for which buyers can easily find comparable substitutes – are often volatile. Although product differentiation gives producers market power, this power alone does not guarantee price stability. There are nearly undifferentiated products whose producers have market power yet for which prices are unstable. Weakness of product differentiation makes it so advantageous for producers to compete on price that they do so and forego the benefits and stability of price collusion. Producers of truly differentiated goods prefer to compete on product performance rather than price and find that reducing prices during recessions does little to increase demand.
Based on hundreds of interviews with businesspeople responsible for setting prices, Bewley’s book is an unusual and groundbreaking work, with findings vital for economists, students, and policymakers.
Renowned economist Truman F. Bewley investigates and elucidates this puzzling problem. Its crux, he argues, is that differentiated product prices are usually stable, whereas the prices of undifferentiated products – for which buyers can easily find comparable substitutes – are often volatile. Although product differentiation gives producers market power, this power alone does not guarantee price stability. There are nearly undifferentiated products whose producers have market power yet for which prices are unstable. Weakness of product differentiation makes it so advantageous for producers to compete on price that they do so and forego the benefits and stability of price collusion. Producers of truly differentiated goods prefer to compete on product performance rather than price and find that reducing prices during recessions does little to increase demand.
Based on hundreds of interviews with businesspeople responsible for setting prices, Bewley’s book is an unusual and groundbreaking work, with findings vital for economists, students, and policymakers.
- GenresEconomicsNonfiction
221 pages, Kindle Edition
Published May 28, 2025
15 people are currently reading
675 people want to read
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 of 1 review
March 23, 2026
Price Setting is an economic treatise that seeks to explain why prices for different products may—or may not—change over the course of the business cycle. Expanding on his earlier work on why wages do not fall during recessions, Yale economist Truman Bewley draws on interviews with dozens of executives across industries such as retail, construction, and agriculture to provide “concrete contexts” for understanding price changes. Arguing that economists have often overlooked the correct explanations for price rigidity, Bewley offers fresh insight into when and why prices are most likely to adjust.
Bewley’s theory of pricing is straightforward: prices of differentiated products rarely fluctuate—up or down—even during economic downturns, while prices of undifferentiated products tend to be far more volatile. Product differentiation, he argues, creates market power, leading firms to prioritize perceived value over price competition. Even in markets for undifferentiated goods, however, producers often resist price cuts, since lower prices may not generate enough additional demand to be profitable and may become entrenched in consumers’ expectations. As one restaurant vice president of marketing notes in Bewley’s interviews, “price movement of any significance is soberly contemplated.” In the restaurant industry, firms frequently resist passing input cost declines on to consumers due to thin margins and the administrative costs of changing menus. Instead, they may adjust portion sizes, allowing cost savings to help “catch up” on already narrow margins.
Bewley also explores procurement practices across a range of industries, including the use of formula-based and fixed-price contracts that reduce uncertainty and shield buyers from price increases. He provides detailed examples of pricing arrangements in construction, cement, lumber, and grain markets, and discusses how hedging—particularly through futures markets—is commonly used in agriculture to manage price risk.
Overall, Price Setting functions as both an industry survey and an academic exploration of the economic forces underlying price dynamics, and how those dynamics vary across products and sectors. It is especially relevant in an era of elevated inflation, offering a clear explanation for why price reductions, once increases have occurred, are often slow and difficult to materialize.
Bewley’s theory of pricing is straightforward: prices of differentiated products rarely fluctuate—up or down—even during economic downturns, while prices of undifferentiated products tend to be far more volatile. Product differentiation, he argues, creates market power, leading firms to prioritize perceived value over price competition. Even in markets for undifferentiated goods, however, producers often resist price cuts, since lower prices may not generate enough additional demand to be profitable and may become entrenched in consumers’ expectations. As one restaurant vice president of marketing notes in Bewley’s interviews, “price movement of any significance is soberly contemplated.” In the restaurant industry, firms frequently resist passing input cost declines on to consumers due to thin margins and the administrative costs of changing menus. Instead, they may adjust portion sizes, allowing cost savings to help “catch up” on already narrow margins.
Bewley also explores procurement practices across a range of industries, including the use of formula-based and fixed-price contracts that reduce uncertainty and shield buyers from price increases. He provides detailed examples of pricing arrangements in construction, cement, lumber, and grain markets, and discusses how hedging—particularly through futures markets—is commonly used in agriculture to manage price risk.
Overall, Price Setting functions as both an industry survey and an academic exploration of the economic forces underlying price dynamics, and how those dynamics vary across products and sectors. It is especially relevant in an era of elevated inflation, offering a clear explanation for why price reductions, once increases have occurred, are often slow and difficult to materialize.
Displaying 1 of 1 review