Pricing Decisions and the Neoclassical Theory of the Firm : A Research Note

Many accountants seem to have accepted the existence of a 'reality gap' between management accounting's conventional wisdom based on the neoclassical economic theory of the firm and actual business practice. Whilst the former recommends the use of a decision relevant cost approach to pricing decisions, the latter is believed to be dominated by a full cost plus approach to pricing. In accepting the existence of reality gap, accountants do not seem to have addressed the arguments of economists. These arguments seriously undermine the research findings or accountants that have given rise to the belief in such a gap. On the other hand, the empirical evidence supporting neoclassical price theory is not strong and much of the research that generated it is methodologically flawed. This paper evaluates the research supporting the accountants' and economists' respective positions and argues that neither is strongly supported by the conflicting empirical evidence. It then identifies the issues that need to be resolved by future research intended to assess whether empirical evidence supports neoclassical price theory of (full) cost plus pricing