There’s a folk wisdom out there that “setting the price”, meaning putting the sticker below the item or announcing what the price is for the good, means you have “control” over the price. Sellers post prices on shelves, so sellers must have power. That sort of thing.

This folk wisdom has intellectual backing. Many critics of mainstream economics argue that “administered pricing”—the fact that firms post prices rather than accepting them from some mythical Walrasian auctioneer—proves supply and demand theory fails to describe real markets. If firms are making deliberate pricing decisions, the argument goes, then prices aren’t being determined by impersonal market forces.

Both claims are wrong.

Knowing who physically announces a price tells us almost nothing about who controls that price or how the market will perform. The confusion stems from conflating two different things: setting a price and controlling a price. A firm sets a price when it announces what it will charge. A firm controls a price when it has meaningful discretion over what that price can be. These are not the same. A firm can set a price while having almost no control over it.

The folk wisdom commits a form of the animistic fallacy, something I’ve written about before. The assumption is that observed outcomes must result from someone’s intentional design. We see a firm posting a price and assume that decision “controlled” the outcome.

Basic economic theory says it cannot be true in general. Moreover, much empirical evidence, both experimental and observational, confirms the theory. “Setting” the price just isn’t that important in most cases.

Don’t mistake physical appearances for Economic Forces

As a general rule, we should not mistake physical appearances for Economic Forces. What matters for prediction is understanding the Economic Forces.

The clearest way to see this is through tax incidence, a lesson from the first month of any Econ 101 course. Suppose Congress passes a law requiring sellers to send a check to the IRS for $1 per gallon of gasoline sold. The next week, they repeal that law and instead require buyers to pay $1 per gallon directly to the IRS at the pump. Does this change who actually bears the burden of the tax?

No. The legal obligation to write the check determines nothing about the economic incidence. What matters is the elasticity of supply and demand. If demand is perfectly inelastic and supply ...