A GLOBAL SUPPLY CHAIN PROFIT MAXIMIZATION AND TRANSFER PRICING MODEL

In environments where tax rates in local regions do not represent major decision factors, a cost minimization methodology, which represents the most common optimization modeling approach for integrated manufacturing and distribution planning, can help formulate an effective integrated plan. However, when planning flexibility or alternatives exist because of differing local country tax rates and types and intra‐company transfer pricing options, cost minimization methodologies may inaccurately identify profit‐maximizing global production and distribution plans. Instead, a profit maximization model that explicitly evaluates decisions such as where to incur tax liabilities and how to set intra‐company prices may be required to develop an integrated global manufacturing and distribution plan. In this paper, we discuss and formulate a model that yields profit maximizing global production and distribution plans. We discuss the managerial implications of our results, and the potential applications and benefits of the model.     

Product Category Pricing and Future Price Attractiveness: 99-Ending Pricing in a Memory-Based Context

Two experiments were used to examine the impact of 99-ending pricing on memory-based comparisons with a multiple product set. Results indicate that when a target is priced above/below a stimulus set, use of 99-ending prices for the highest and lowest prices in the stimulus set lessens target price attractiveness compared to when the highest and lowest prices are 00-ending. Attractiveness of targets priced within the stimulus set was not impacted by the use of 99- versus 00-ending pricing. Overall, participants appear to use an assimilation/contrast approach based upon left-digit processing in determining target price attractiveness.     

Pricing of New Securities in an Incomplete Market: the Catch 22 of No-Arbitrage Pricing

There are two distinctly different approaches to the valuation of a new security in an incomplete market. The first approach takes the prices of the existing securities as fixed and uses no-arbitrage arguments to derive the set of equivalent martingale measures that are consistent with the initial prices of the traded securities. The price of the new security is then obtained by appealing to certain criteria or on the basis of some preference assumption. The second method prices the new security within a general equilibrium framework. This paper clarifies the distinction between the two approaches and provides a simple proof that the introduction of the new security will typically change the prices of all the existing securities. We are left with the paradox that a genuinely new derivative security is not redundant, but the dominant pricing paradigm in derivative security pricing is the no-arbitrage approach, which requires the redundancy of the security. Given the widespread practice of using the no-arbitrage approach to price (or bound the price of) a new security, we also comment on some justifications for this approach.     

Fair bilateral pricing under funding costs and exogenous collateralization

Bielecki and Rutkowski introduced and studied a generic nonlinear market model, which includes several risky assets, multiple funding accounts, and margin accounts. In this paper, we examine the pricing and hedging of contract from the perspective of both the hedger and the counterparty with arbitrary initial endowments. We derive inequalities for unilateral prices and we study the range of fair bilateral prices. We also examine the positive homogeneity and monotonicity of unilateral prices with respect to the initial endowments. Our study hinges on results from Nie and Rutkowski for backward stochastic differential equations (BSDEs) driven by continuous martingales, but we also derive the pricing partial differential equations (PDEs) for path‐independent contingent claims of a European style in a Markovian framework.     

Do Consumers Care about how Prices are Set?

Using a survey approach, we ask consumers to reveal their preferences over pricing schemes that may differ in terms of the average price of consumption, the amount of price variation, and the probability of being rationed. We find that consumers dislike pricing schemes that vary prices more but that they are willing to trade off price variation and rationing. Surprisingly, they are not willing to trade off an increase in price variation for a decrease in expected prices. We discuss the implications of these findings for firm pricing policies.     

Consumer Perceptions of Precise vs. Just-Below Prices in Retail Settings

Consumer perceptions of the effectiveness of precise prices in communicating good value are compared to that of just-below prices in a retail context. Two studies demonstrate that a retailer employing a precise pricing strategy is seen as offering lower prices relative to one using just-below prices. The likelihood of consumers going to a competitor in hope of finding a better deal was also lower with precise compared to just-below prices. However, this precision effect disappeared when two prices—an original and a discount one—were displayed as part of a promotional discount.     

The Pricing Kernel Puzzle: A Real Phenomenon or a Statistical Artifact?

A large literature finds evidence that the pricing kernels estimated from option prices and historical returns are not monotonically decreasing in market returns. We show that the inevitable coalescence of contingencies, especially in the left‐tail, associated with estimating a distribution function may give rise to a nonmonotonic empirical pricing kernel even if the actual pricing kernel is monotonic. Hence, the observed nonmonotonicity of pricing kernels may be a statistical artifact rather than a real phenomenon. We argue that empirical work should explicitly correct for this effect by widening the option pricing bounds associated with monotonic pricing kernels.     

Option Pricing in Discrete‐Time Incomplete Market Models

Various aspects of pricing of contingent claims in discrete time for incomplete market models are studied. Formulas for prices with proportional transaction costs are obtained. Some results concerning pricing with concave transaction costs are shown. Pricing by the expected utility of terminal wealth is also considered.     

Online Price Discrimination and EU Data Privacy Law

Online shops could offer each website customer a different price. Such personalized pricing can lead to advanced forms of price discrimination based on individual characteristics of consumers, which may be provided, obtained, or assumed. An online shop can recognize customers, for instance through cookies, and categorize them as price-sensitive or price-insensitive. Subsequently, it can charge (presumed) price-insensitive people higher prices. This paper explores personalized pricing from a legal and an economic perspective. From an economic perspective, there are valid arguments in favour of price discrimination, but its effect on total consumer welfare is ambiguous. Irrespectively, many people regard personalized pricing as unfair or manipulative. The paper analyses how this dislike of personalized pricing may be linked to economic analysis and to other norms or values. Next, the paper examines whether European data protection law applies to personalized pricing. Data protection law applies if personal data are processed, and this paper argues that that is generally the case when prices are personalized. Data protection law requires companies to be transparent about the purpose of personal data processing, which implies that they must inform customers if they personalize prices. Subsequently, consumers have to give consent. If enforced, data protection law could thereby play a significant role in mitigating any adverse effects of personalized pricing. It could help to unearth how prevalent personalized pricing is and how people respond to transparency about it.     

Per piece or per kilogram? Default-unit effects in retailing

Retailers offer a variety of products either per unit or per weight. Depending on the product category, consumers may find either one of these pricing strategies typical and the default. Especially online retailers are increasingly using unit-based prices, which is the non-default for many produce categories. So far, consequences resulting from non-default pricing strategies are unclear. This study addresses the questions of whether and how pricing strategies affect consumer behavior. In a series of four experiments, we show that default pricing strategies exist in the marketplace and that consumers prefer products that retailers offer using default pricing strategies. We also demonstrate that this behavior is due to uncertainty issues when assessing prices in non-default pricing strategies. Furthermore, we elaborate on the influence of weight expectations and explicitly stated weight information on this default-unit effect. The findings suggest that retailers can mitigate negative effects resulting from non-default pricing strategies by providing weight information.     

Explaining the exchange rate pass-through in different prices

This paper examines the performance of a variety of new open economy macroeconomic models in explaining the exchange rate pass-through in a wide range of prices. Quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock. Predicted responses are compared with the evidence based on VAR models to examine how well different models fit the data. The results show that the best-fitting model incorporates a number of features highlighted by different strands of the literature: sticky prices, sticky wages, distribution costs and a combination of local (LCP) and producer currency pricing (PCP).     

Viability and Equilibrium in Securities Markets with Frictions

In this paper we study some foundational issues in the theory of asset pricing with market frictions. We model market frictions by letting the set of marketed contingent claims (the opportunity set) be a convex set, and the pricing rule at which these claims are available be convex. This is the reduced form of multiperiod securities price models incorporating a large class of market frictions. It is said to be viable as a model of economic equilibrium if there exist price-taking maximizing agents who are happy with their initial endowment, given the opportunity set, and hence for whom supply equals demand. This is equivalent to the existence of a positive lineaar pricing rule on the entirespace of contingent claims—an underlying frictionless linear pricing rule—that lies below the convex pricing rule on the set of marketed claims. This is also equivalent to the absence of asymptotic free lunches—a generalization of opportunities of arbitrage. When a market for a nonmarketed contingent claim opens, a bid-ask price pair for this claim is said to be consistent if it is a bid-ask price pair in at least a viable economy with this extended opportunity set. If the set of marketed contingent claims is a convex cone and the pricing rule is convex and sublinear, we show that the set of consistent prices of a claim is a closed interval and is equal (up to its boundary) to the set of its prices for all the underlying frictionless pricing rules. We also show that there exists a unique extended consistent sublinear pricing rule—the supremum of the underlying frictionless linear pricing rules—for which the original equilibrium does not collapse when a new market opens, regardless of preferences and endowments. If the opportunity set is the reduced form of a multiperiod securities market model, we study the closedness of the interval of prices of a contingent claim for the underlying frictionless pricing rules.     

Retailer Dynamic Pricing and Ordering Decisions: Category Management versus Brand-by-Brand Approaches

This paper provides a framework for retailer pricing and ordering decisions in a dynamic category management setting. In this regard, the key contributions of this paper are as follows. First, we develop a multi-brand ordering and pricing model that endogenizes retailer forward buying and maximizes profitability for the category. The model considers (i) manufacturer trade deals to retailers, (ii) ordering costs incurred by the retailer, (iii) retailer forward buying behavior, and (iv) both own- and cross-price effects of all the brands in the category. Second, we use this model to compare differences in ordering and pricing decisions, and in profits, resulting from using a category management versus a brand-by-brand management approach. Our approach allows us to derive implications in a dynamic setting about the impact of interdependence among the brands upon decisions on pass-through of trade deals and retailer order quantity. We show that category management results in noticeably higher profits versus brand-by-brand and cost-plus (markup) approaches. Further, our results suggest an interaction between a brand's own-price effect and its cross-price effect emerges. If the cross-price effect for a brand is low - that is, the brand takes away relatively few sales from the other brands - the retail pass-through should increase with that brand's own-price effect. On the other hand, when the cross-price effect is high, the retail pass-through decreases with the brand's own-price effect.     

Exchange rates and prices: Evidence from China

This article develops a pricing model that incorporates an industrial organization approach with the traditional quantity theory of money to explain the impact of exchange rates on consumer prices. Using time-series data on prices and exchange rates of China, the model replicates the main features of the observed facts: exchange rates influence consumer prices through changing import prices; money supply and output influence consumer prices following the quantity theory. The estimating results show that exchange-rate pass-through to consumer prices is low and increases from the short run to the long run. The extent of pass-through is likely to depend on markup adjustment and marginal costs.     

Barriers to implementing value-based pricing in industrial markets: A micro-foundations perspective

Value-based pricing has the potential to improve differentiation, profitability, and value creation for industrial firms and their customers. However, while most of the pricing research considers the ways organizations set or get value-based prices, only few studies consider how individual managers influence the pricing process and what prevents them from setting and getting value-based prices. This is of critical concern, since it is not just organizations, but individuals within organizations who make pricing decisions—and their decision-making is influenced by institutional pressures such as socially prescribed norms, rationalized meanings, and beliefs about profitable approaches to pricing. This study addresses this gap in the current knowledge by adopting a micro-foundations perspective to pricing, and focusing on the barriers that individual managers encounter when implementing value-based pricing. Drawing on a single case study in a global industrial firm, and from interviews with 24 managers, this study identifies 11 individually, organizationally, and externally induced barriers to value-based pricing. The study also sheds light on the potential sensegiving strategies for overcoming these barriers.     

连锁经营定价和库存决策的比较分析

连锁经营下销售同一商品的多个零售店铺面临价格敏感且需求相关的需求,建立总部统一决策,追求总部利润最大化和总部下属各个零售店铺独立决策,追求各自利润最大化条件下的定价和库存决策模型。通过数值示例计算以上两种决策模型下总部的总体最优期望利润,并分析此时需求、成本、价格敏感性和零售店铺交叉价格弹性变化对总部下属各个零售店铺的对应价格、利润和总利润的影响,分析得出连锁经营统一采购和定价的优势。     

Why offer lower prices to past customers? Inducing favorable social price comparisons to enhance customer retention

Price discrimination policies vary widely across companies. Some firms offer new customers the lowest price; others give preferential prices to their past customers. We contribute to the literature on price discrimination in behavior-based pricing by exploring how customers’ social price comparisons, i.e., comparing one’s price to that received by similar peers, impact the optimal structure of price discrimination. Social price comparisons have a negative (positive) impact on customers’ transaction utility if the price charged to past customers is higher (lower) than a new customer’s price. Using an analytical model with vertically differentiated firms, we show that a firm with relatively large market share will reward its past customers with relatively low prices when social price comparisons have a sufficiently large impact on utility. Furthermore, we find that social price comparisons lead to a relaxation of the price competition for new customers. Thus, both firms can earn higher profits when such comparisons are made than when they are absent. We also examine how other factors, such as horizontal competition and strategic customers, interact with social price comparison concerns to impact pricing strategies. Finally, we show how pricing behavior differs when price comparisons are based on historic reference prices rather than on peers’ prices.     

Is transparency a good thing? How online price transparency and variability can benefit firms and influence consumer decision making

The internet has empowered consumers and changed the way they search and shop for products and services by increasing the availability and transparency of pricing and other comparative information. However, what is less clear from a managerial perspective is just how transparent pricing information should be. While it might seem that increasing price transparency would reduce consumer search, we find that it may actually increase search and delay. In this article, we review the use of firms’ application of price transparency in practice and propose that specific types of information can influence how transparent prices are to consumers, and how such transparency can influence consumer decisions in a way that is beneficial for the firm. We focus on a specific form of transparency: whether or not the consumer knows the range of pricing. We also discuss whether a high variability pricing approach versus a low variability pricing approach influences consumer decision making—and whether this influence is moderated by transparency.     

Value-based pricing in competitive situations with the help of multi-product price response maps

This article introduces multi-product price response maps for various value pricing applications in competitive situations. The maps are based on the direct elicitation of individual willingness to pay (WTP) as a range for competing products; they reveal an individual's or market's choice probability for a focal product, at its own and competing products' prices. Transforming the price response into profit, revenue, or unit sold maps supports optimal pricing decisions. The maps are also useful for optimizing profit differences from the closest competitor and for portfolio pricing. Managers can use a consumer indecisiveness map, gained from the WTP range data, to devise complementary marketing measures at prices where consumer uncertainty is high. The illustration of this approach uses two empirical examples, featuring two or more competing consumer goods, and demonstrates the predictive and external validity of these proposed maps.     

Pricing as a driver of profitable growth: An agenda for CEOs and senior executives

Most CEOs take a narrow, tactical view of pricing and delegate pricing to lower levels of the organization. This myopic approach is costly, as it prevents companies from realizing their potential. In the hands of the best-run companies, pricing is not a battlefield tactic to win a particular competitive skirmish but a transformative long-term strategy for sustained competitive advantage. We present an agenda of six specific action items that defines how to unlock the power of pricing. CEOs and senior executives, our research suggests, should not set prices, but instead, they should create the context, the capabilities, the behaviors, the infrastructure, and the aspirations that enable their organization to excel in pricing.