Econometric Interpretations of the Normal Cost Pricing Hypothesis.

This paper considers alternative interpretations of the Normal Cost Hypothesis of industrial pricing behaviour. It shows first that the hypothesis can interpreted as implying that actual unit costs are an endogenous variable, for which some measures of normal unit costs are an appropriate instrument. The paper olso considers the implications of the regarding Normal Cost Hypothesis as a statement about the properties of the long-run equilibrium relationship between costs and prices, and applies cointegration techniques to the resulting equation for manufacturing output in the UK over the period 1975Q1- 1992Q4.