Pricing decisions and the neoclassical economic theory of the firm: management accounting practice in the context of a realist methodology and research strategy

• Main Author: Lucas, Michael Robert
• Published: University of Buckingham 2005
• Subjects: 338.6041
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.566278

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. This conventional wisdom advocates a decision relevant approach to cost analysis for pricing and product mix decisions, whereas actual business practice is believed to be dominated by (full) cost plus pricing. In accepting the existence of a reality gap, however, accountants do not seem to have addressed the arguments of economists. These seriously undermine the research findings that have given rise to the belief by accountants in such a gap. On the other hand, the empirical evidence supporting neoclassical price theory is not robust and much of the research that generated it is methodologically flawed, with results in conflict. Previous research, therefore, has failed to establish whether a 'reality gap' exists between neoclassical price theory and actual business practice. However, while a reality gap is recognised and the neoclassical view regarded as flawed, accounting researchers have nevertheless failed to make significant impact with the arguments supporting their standpoint. It is argued here that this challenge has not been robustly prosecuted because of a lack of confidence in the research frameworks utilised to explore the so - called 'reality gap'. This thesis contributes a new research framework for identifying the existence and extent of any potential reality gap between the assumptions of neoclassical theory and management accounting practice. The framework constructed identifies all the significant issues that need to be resolved, to address the shortcomings of previous research, in order to make a meaningful evaluation of whether actual behaviour is in accordance with neoclassical assumptions, or is better explained by the institutional economics paradigm, as has been suggested by a number of recent contributions to the Management Accounting literature. Previous research has failed to do this. This new research framework employs a case study approach based on a realist methodology. This thesis also reports on the empirical findings from six case studies of commercial organisations, undertaken in order to demonstrate the practical applicability of the new framework in producing meaningful results concerning the existence of a reality gap between theory and practice. The insights obtained from the case studies are tentatively suggested as themes which future researchers may replicate or extend, in order to enhance knowledge and understanding of pricing and product mix decisions.