Pricing(redirected from Price optimization)
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the establishment of prices, price levels, and price relationships.
In presocialist formations, the pricing process takes place spontaneously, through the market, in the course of competition between commodity producers. Being subject to the law of value and the law of supply and demand, the market prices of commodities constantly deviate from value.
Under capitalism, the changing values of commodities and changing value proportions have a decisive effect on price dynamics. The growing productivity of labor and reduced expenditures of actual and embodied labor per unit of use value are major factors in reducing the cost of commodities. In the words of K. Marx, “if we set aside individual counteracting influences . . ., the tendency and the result of the capitalist mode of production are to constantly raise labor productivity and consequently . . . to effect the constant distribution of newly added labor over a greater volume of output, thus lowering the price of individual commodities or lowering commodity prices in general” (K. Marx and F. Engels, Soch., 2nd ed., vol. 49, p. 15). In their quest for excess surplus value, capitalists seek to reduce individual production costs and to lower prices in order to crowd out competitors and expand sales markets for their commodities.
The rapidly rising level of technology and improvement in the quality of machines may result in a price increase per physical unit of machinery; but in relative terms, if the machine’s increased effectiveness is taken into account, its unit price declines. “By relative decline in the price of machinery,” said Marx, “I refer to a state of affairs in which the absolute value of all the machines employed increases, but not to a degree such as to increase the total volume and effectiveness of these machines” (ibid., vol. 26, part 3, p. 228, footnote).
Under premonopoly capitalism, pricing is used spontaneously as a means of regulating the proportions of social production (the latter being constantly disrupted); this is done by increasing the production of commodities, raising the prices of commodities whose supply fails to meet the demand, and curtailing production when prices fall as a result of the relative overproduction of one or another commodity. Through the periodic crises of overproduction, the pricing mechanism preserves the proportions of social reproduction (the reduction of prices resulting from the renewal of fixed capital is one way of resolving a crisis and adapting production to new conditions). Pricing is also the mechanism through which the law of relative surplus value is realized (lowering the cost of goods and services made available to factory workers as a result of increased labor productivity is the basis for reducing labor costs, cutting down necessary labor-time, and increasing surplus labor-time).
The capitalist pricing mechanism undergoes substantive changes in the stage of imperialism. Monopolies conclude cartel agreements on prices; they sell goods at monopolistically established high prices and buy raw materials at monopolistically established low ones. They offset the price reductions that accompany reduced production costs or that occur during recovery from a crisis. Monopoly prices are sustained by state-monopoly regulation. The dominant trend at this stage is the inflationary rise of prices, which made a quantum leap in the first half of the 1970’s (Table 1).
The inflationary rise of prices intensifies the contradictions inherent in the capitalist economic system and reflects the decay of capitalism in the period of its general crisis. Rising prices represent a particularly heavy burden for the working people, resulting in the reduction of their real income and affecting the operation of the economic laws of capitalism itself. Reductions in the cost of commodities are not accompanied by reductions in the overall
|Table 1. Inflationary price rises in some capitalist countries and on the world market|
|2Second quarter of 1976|
|3Third quarter of 1976|
|Consumer price index (1963 = 100)|
|Great Britain ...............||61||91||108||135||249||290|
|Federal Republic of Germany ...............||77||92||106||120||162||169|
|World export price index (1950 = 100)|
|All commodities ...............||89||100||103||113||244||2402|
|Raw materials ...............||103||99||103||108||326||3383|
|agricultural nonfood ...............||78||105||103||101||198||2273|
|Nonferrous metals ...............||—||106||135||180||202||2543|
|Finished products ...............||79||98||103||117||213||2123|
price level, even though individual commodity prices may drop. In times of crisis the monopolies prefer production cutbacks to price reductions. Pricing is subject to increasing state intervention in the monopolies’ interest.
Inflationary price rises are also observed in the developing countries (Table 2). In the developing countries that are ruled by democratic forces, measures are taken to limit such price increases and to monitor pricing procedures and practices.
Pricing policy and practice undergo radical changes with the transition to socialism. In the period of transition from capitalism to socialism the proletarian state fully controls the pricing mechanism and effectively uses it as a tool to restrict and crowd out the bourgeoisie, to transform the small-scale commodity system, to develop and consolidate the socialist economy, and to raise the living standard of the laboring masses. V. I. Lenin regarded the activity of the Soviet state in the realm of pricing as an important component of the struggle for socialism: “Only when the Commissariat for Food, in conjunction with the Commissariat for Agriculture, nationalizes all goods and fixes prices—do we really come close up to socialism” (Poln. sobr. soch., 5th ed., vol. 36, p. 509).
It was in the transitional period that Soviet price policy was formed, the principles of planned pricing were formulated, and the proletarian state’s first price regulation agencies were established (the committee on prices of the Supreme Council on the National Economy started operating in late 1918).
Planned pricing is an economic management tool wielded by the socialist state; it is based on public ownership of the means of production and the planned development of the economy, and it makes deliberate use of the system of economic laws, including the law of value. Planned pricing consists in developing basic pricing factors, setting prices for the most important categories of goods and services, and planning the changes to be made in the levels, relationships, and structures of prices. Planned pricing under socialism includes the establishment of prices (drafting, review, and ratification of price lists and projected prices of new products); price planning and forecasting; coordination (reconciliation) of the prices established by different agencies (for example, by republic and local agencies) on similar goods and services; and verification of the legitimate adoption and correct application of ratified prices (ensuring the observance of state regulations with respect to prices).
The following are the basic principles of planned pricing under socialism.
(1) Prices are approximately equal to the socially necessary expenditures of labor, and changes in the levels and proportions of such expenditures are promptly reflected in the price system. Planned prices are stable and not subject to market fluctuations. At the same time, prices are periodically reviewed to reflect substantive and steady changes in production and sales.
(2) Prices are deliberately used to stimulate scientific and technological advances and to improve product quality through price differentiation. The pricing of new technology conforms to the principle of its relatively lower cost: in setting wholesale prices for new products—especially machinery and equipment—the price level is to be reduced per unit of effective performance (see Materialy XXV s”ezda KPSS, 1976, p. 173).
(3) Prices are used to stimulate the efficient use of productive resources—namely, to increase labor productivity and save labor resources, to reduce the material-intensiveness, or materials-output ratio, and increase capital productivity, to enhance the rational use of natural resources, to ensure comprehensive recovery of natural raw materials, and to reduce the extent of environmental damage. Prices are increasingly faithful reflections of the expenditures that are socially necessary for the discovery, reproduction, and preservation of natural resources.
(4) The pricing mechanism is used to solve certain socioeconomic problems—specifically, to eliminate substantive differences between town and country, ensure steady growth in the population’s real income, and improve working and living conditions. This principle is realized by various means: (a) through the use of state purchase prices and prices paid by kolkhozes and sovkhozes for the means of production, which make it feasible, in economic terms, to transform agricultural labor into a form of industrial labor and to close the gap between urban and rural income levels; (b) by stabilizing the level of state retail prices of basic commodities and lowering the price of individual commodities when conditions make it possible to do so; (c) by setting lower prices on goods and services of special social importance; and (d) by taking the social factor into account in establishing prices for new technology.
(5) The pricing mechanism supports the institution of the profit-and-loss accounting system in all parts of the national economy; for the various enterprises and associations, pricing offers an economic incentive to raise production efficiency, reduce the prime cost of production, and practice economies. The pricing mechanism also equalizes the conditions of profit-and-loss accounting for enterprises and associations operating under unequal objective conditions; this is accomplished by various means, such as the use of accounting prices and fixed (rent) payments.
The regular patterns of pricing and price dynamics that are intrinsic to socialism are realized through planned pricing. The wholesale price level is based on the country’s (or pricing region’s) average prime cost of production (which reflects the normal social costs of production) and on standard rates of profit. The process of setting specific prices takes into account the ratio of consumptive characters, in terms of quality or consumptive effectiveness, of similar and interchangeable commodities. In the case of agricultural products, popular consumer goods, and services, the social factor plays a large part in pricing, and consequently prices are often significantly higher or lower than values.
Price dynamics are influenced by a variety of factors, including the growth of labor productivity, the accelerated pace of scientific and technological progress, the improvement of product quality, the changes in the natural conditions of production, the higher costs of reproduction of natural resources and environmental protection, the population’s steadily rising monetary income, the shifting and displacement of production sites, and the amount of paper currency in circulation; foreign economic factors also influence price dynamics. As a result of all these influences, the dynamics of prices differ from the dynamics of value.
|Table 2. Consumer price indexes in some developing countries (1963 = 100)|
|Pakistan (Karachi) ...............||73||97||110||137||272||291|
|Argentina (Buenos Aires) ...............||5||56||157||380||61-fold||248-fold|
|Mexico (Mexico City) ...............||47||97||106||126||212||2891|
|Uruguay (Montevideo) ...............||16||74||223||2331||323-fold||486-fold3|
State retail and wholesale prices in the USSR are relatively stable (see Table 3); state purchase prices were repeatedly raised in the 1950’s and 1960’s in order to ensure the development and technical reconstruction of agriculture and raise the wages of kolkhoz and sovkhoz workers.
|Table 3. Dynamics of wholesale and state retail prices in the USSR (1940 = 100)|
|Industrial wholesale price index|
|All industry ...............||170||128||129||127||136||132|
|heavy industry ...............||140||107||106||101||116||108|
|light industry and food industry ...............||210||156||159||160||159||163|
|State retail price index|
|All commodities ...............||186||138||139||140||139||139|
|nonfood commodities ...............||165||134||130||126||124||122|
Measures are being taken to improve the organization of planned pricing and to refirie its methods. In 1970 a single system of USSR state pricing agencies was established for all the Union republics; the system includes the State Price Committee of the Council of Ministers of the USSR, the state price committees of the councils of ministers of the Union republics, and the price departments of the councils of ministers of the ASSR’s and of various oblast and krai executive committees, as well as the price subdivisions established in the Union and republic ministries and agencies and in a number of associations and large enterprises. Price legislation has been improved, the rights and duties of various pricing agencies have been defined more precisely, and a wider range of pricing standards and methods has been adopted.
Pricing is increasingly based on scientific research. A specialized scientific research institute for prices was established in 1967. As of 1976, more than 200 scientific research institutes—both general economic and branch institutes—and higher educational institutions throughout the USSR were engaged in research on prices; their activities in this area are coordinated by the Interdepartmental Scientific Council on Pricing (founded 1972) of the State Price Committee and by the Academy of Sciences of the USSR.
In practice, standard-parameter pricing methods are increasingly applied in price list calculations as well as in justifying the prices of new types of products. Such methods ensure a price structure based on standard expenditures and profitability, taking into account the ratio of consumptive characters of manufactured goods to the consumer. An automated system for processing price data is in the development stage. The system uses mathematical-economics models, modern computer technology, and systems analysis to raise the nationwide level of management efficiency, to plan and forecast prices, to draw up price lists, to coordinate, monitor, and analyze prices, and to ensure the availability of price data to all sections of the national economy.
The Twenty-fifth Congress of the CPSU (1976) prescribed a set of measures for the further improvement of planned pricing: prices were to play a more active role in the drive to accelerate the rate of scientific and technological progress, update production, improve product quality, and make rational use of material resources; it was decided to continue the policy of maintaining stable state retail prices on basic food and nonfood commodities, to preserve the principle of strictly planned state purchases of agricultural products, and to continue setting higher state purchase prices as an inducement for farms to sell above-plan output to the state.
The same principles and methods that are used in the USSR are applied to planned pricing in the other socialist countries. Various price agencies, state committees, and price commissions supervise planned pricing. Individual countries have their own pricing methods and their own price levels, relationships, structure, and dynamics. These differences stem from different conditions of natural, economic, and technological development and from the specific characteristics of each country’s economic system. Price agencies and their research institutes are seeking ways of instituting parallel internal pricing methods among the member nations of the Council for Mutual Economic Assistance—such coordination being a means to promote the growth of socialist economic integration.
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