A cost-plus trap: Pricing heuristics and demand identification

Cost plus pricing is a common pricing heuristic. We investigate whether a firm, following cost plus pricing in a simple environment, will eventually have enough information about demand conditions to switch to an optimization-based pricing approach. We find that with unsophisticated statistical approaches this is unlikely, and even with a Bayesian decision theoretic approach there can be what we call a cost plus trap.     

Successful New Product Pricing Practices: A Contingency Approach

The purpose of this study is to examine the success of new product pricing practices and the conditions upon which success is contingent. We distinguish three different pricing practices that refer to the use of information on customer value, competition, and costs respectively. Following Monroe's (1990) price discretion, we argue that the success of these practices is contingent on relative product advantage and competitive intensity. The hypotheses are tested on pricing decisions for new industrial products. Our results show that there are no general best or bad practices, but that a contingency approach is appropriate. These results may help reduce the complexity that managers experience in pricing new products.     

我国转让定价制度的新突破——基于新《企业所得税法》“特别纳税调整”的分析

<中华人民共和国企业所得税法>中的"特别纳税调整"的适时出台,既是我国规制转让定价行为的税收法律体系建设的需要,也是我国转让定价制度的一次新的突破.它不仅提高了转让定价制度的法律层级,增强了其权威性与拘束力,而且还补充、完善了原有转让定价制度的缺憾之处,使其更具系统化、规范化.有效地解决了原有的定价转让制度中存在的法律层级偏低,缺乏权威性;相关规定过于简单,不完整性问题等问题,使我国转让定价制度更加具有系统性与可操作性.     

Social Network-Based Discriminatory Pricing Strategy

In this paper we study such pricing practices like MCI's Friends and Family Program that employ price discriminations on the basis of callers' social ties. We characterize a consumer's personal communication network by the number of strong and weak ties that the consumer has. We then derive a consumer's demand for communication service from the structure of the consumer's personal communication network. A monopoly firm's social network-based discriminatory pricing strategy consists of a menu of price plans, each plan targeting at one type of social networks. Our paper provides useful guidelines for the design of optimal social network-based discriminatory pricing strategies. We show that a firm may offer price discounts to communications between friends and family members in order to extract a larger profit from communications between callers with weak ties.     

Optimal criteria for selecting price discrimination metrics when buyers have log-normally distributed willingness-to-pay

This paper investigates how a monopoly seller should determine the optimal set of pricing variables (pricing metrics) for third-degree price discrimination applications in which buyers have log-normally distributed willingness-to-pay (WTP). In a setup that closely resembles linear and probit regressions, this paper shows that when the monopoly seller is restricted to using one metric and no price discrimination cost exists, the pricing metric that best reduces the residual variance of buyers’ willingness-to-pay is the one that maximizes revenue. Equivalently, the explanatory power of willingness-to-pay is the ordering criterion. This paper also shows that this criterion is not universally true when willingness-to-pay follows other distributions. When the seller incurs price discrimination costs associated with different metrics, the ordering criterion becomes the explanatory power of each pricing metric divided by its cost. This paper also discusses how to apply this model to solve real-world pricing problems with contingent valuation models or using probit regression.

PRICING COUPON-BOND OPTIONS AND SWAPTIONS IN AFFINE TERM STRUCTURE MODELS

This paper provides a numerically accurate and computationally fast approximation to the prices of European options on coupon-bearing instruments that is applicable to the entire family of affine term structure models. Exploiting the typical shapes of the conditional distributions of the risk factors in affine diffusions, we show that one can reliably compute the relevant probabilities needed for pricing options on coupon-bearing instruments by the same Fourier inversion methods used in the pricing of options on zero-coupon bonds. We apply our theoretical results to the pricing of options on coupon bonds and swaptions, and the calculation of "expected exposures" on swap books. As an empirical illustration, we compute the expected exposures implied by several affine term structure models fit to historical swap yields.     

Manufacturer-Optimal Wholesale Pricing When Retailers Compete

The existing marketing science literature on channels of distribution has emphasized pricing strategies that maximize either channel or manufacturer margin. This emphasis has implicitly assumed that optimal wholesale prices are independent of any fixed fees charged by the manufacturer. While this assumption is justified in a single-manufacturer, single-retailer world, it generally does not lead to manufacturer profit maximization in a world of competing retailers. In this paper we derive a manufacturer-optimal wholesale pricing strategy by simultaneously determining both elements of a two-part tariff (consisting of a wholesale price and a fixed fee). We show that the manufacturer will always prefer this sophisticated pricing strategy to one that maximizes either channel or manufacturer margin. We also show that both elements of the optimal tariff are functions of the absolute difference between retailer fixed costs.     

Transfer Pricing for the Rest of Us

Transfer pricing is a frequently discussed but often misunderstood aspect of international business. This article describes what it is, its legitimate functions in accounting for international intra-firm transactions, and its use by corporations for tax optimization. However, there may be mitigating factors that make efforts to optimize taxes more apparent than real. The issues of transfer pricing require sophisticated economic analysis for understanding and resolution, particularly as they relate to the internal and external pricing environment faced by a firm and the principles of profit allocation among different parts of a firm.     

Regain control of your international prices

Companies that strive too long for internationally differentiated pricing run the risk that prices erode. Price harmonization therefore has to be given top priority. By professionally performing the three steps described below, companies can systematically align their prices according to their customers’ purchasing behavior and thus regain control of the international pricing system.     

Estimating demand for cellular phone service under nonlinear pricing

Cellular phone carriers typically offer complicated nonlinear tariffs. Consumers make a discrete choice among several rate plans. Each plan has a nonlinear price schedule, and price is usually lower for in-network calls. I present an empirical framework to estimate demand under such nonlinear pricing schemes by using parsimonious carrier-level data and apply the estimation method to analyze the market in Taiwan. I evaluate the impacts of termination-based pricing schemes on the market structure by counterfactual simulations. There is no evidence showing that the network effect resulting from termination-based pricing has significant effects on market structure.

Unequal Pricing in the Information Economy: Implications for Consumer Welfare

This article presents an economic analysis of information good pricing and consumer welfare, and discusses the implications of price discrimination in the information economy. It argues that network externalities, coupled with information asymmetry, enable a dominant marketer to price unequally, extracting late adopters surplus to compensate for the loss from early adopters. In the short term, the minority early adopters benefit by paying less, but in the long term, the majority late adopters suffer by paying more. Considering that late adopters are likely to be at a disadvantage in resources, this discriminatory pricing amounts to the poor subsidizing the rich. Based on this analysis, implications for consumer welfare are discussed.     

Competitive price-cutting momentum and pricing reactions

In light of the increasing interest in understanding the behavioral side of competitive decision making, this paper examines how the price-cutting momentum (PCM) created by other competiors' reactions to an initiator's price cut influences pricing decisions. We explore the PCM construct and present the results of a study examining the effect of PCM on the price recommendations of retail grocery pricing executives. We find that PCM influences pricing reactions inboth low-search and high-search markets. Competing explanations of the results are considered.The authors acknowledge the financial support of the Department of Sponsored Programs and Research at the University of South Carolina and the Crane Professorship at the Ohio State University.     

基于K线图的收益管理浮动价格博弈

研究价格浮动与座位存量分配控制相结合,通过价格动态调整以缩小预测误差所带来的航班收益损失。首次在收益管理系统中融入顾客与航空公司的博弈性,提出收益管理K线图研究思想,以直观反映价格波动和市场变化情况。虚拟舱位容量概念的提出,以减少旅客市场的季节性影响,将最大超售量作为虚拟舱位容量的一部分。虚拟舱位容量算法简洁易行。仿真运算结果显示,该方法通过直接获取潜在需求数据,能够提高航班座位利用率,并使航空公司不同航班在原有收益管理系统基础上分别提高2%至10%甚至更高的收益。     

A Client Driven Model for Service Pricing

The pricing of services is perhaps the most important and perplexing issue facing marketers today. Success depends on setting it correctly. Although economic principles do provide pricing guidelines, they are often too general to apply in everyday business settings. This article presents an alternative by describing a pricing model meant to help the front-line marketer. The model is "Client Driven" because it is built on client response to price, namely the quantity of services used and the number of clients gained or lost. Its objective is to set a price level, both short and long-term, to maximize profits. It works equally well for the marketing of either services or products. This article explores the model's structure, major findings and implications. A number of interesting results are obtained; for example the relationship between optimal price and market share. The article also illustrates with an actual case how to use the model in practical settings. The model can easily be set up on a personal computer, and is a useful simulation tool for exploring pricing strategy.     

Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games

Firms in durable good product markets face incentives to intertemporally price discriminate, by setting high initial prices to sell to consumers with the highest willingness to pay, and cutting prices thereafter to appeal to those with lower willingness to pay. A critical determinant of the profitability of such pricing policies is the extent to which consumers anticipate future price declines, and delay purchases. I develop a framework to investigate empirically the optimal pricing over time of a firm selling a durable-good product to such strategic consumers. Prices in the model are equilibrium outcomes of a game played between forward-looking consumers who strategically delay purchases to avail of lower prices in the future, and a forward-looking firm that takes this consumer behavior into account in formulating its optimal pricing policy. The model outlines first, a dynamic model of demand incorporating forward-looking consumer behavior, and second, an algorithm to compute the optimal dynamic sequence of prices given these demand estimates. The model is solved using numerical dynamic programming techniques. I present an empirical application to the market for video-games in the US. The results indicate that consumer forward-looking behavior has a significant effect on optimal pricing of games in the industry. Simulations reveal that the profit losses of ignoring forward-looking behavior by consumers are large and economically significant, and suggest that market research that provides information regarding the extent of discounting by consumers is valuable to video-game firms.

Expectations and Attitudes Toward Gender-Based Price Discrimination

This study explores consumer expectations and attitudes related to gender-based price discrimination. Although much research has focused on pay inequalities and gender diversity, considerably less attention has been focused on situations in which men and women are charged different prices based on gender. In two studies, expectations and attitudes toward gender-based price discrimination are examined. In Study 1, two scenarios related to prices at hair salon and dry cleaning services were manipulated to measure expectations and attitudes toward gender-based price discrimination. We found that the nature of the service results in expectations of price differences between men and women. We also found men expect gender-based pricing more than women. In Study 2, qualitative research was conducted to reveal the cognitions that men and women experience when exposed to gender-based price discrimination.     

Too close to be similar: Product and price competition in retail gasoline markets

We examine how product and pricing decisions of retail gasoline stations depend on local market demographics and the degree of competitive intensity in the market. We are able to shed light on the observed empirical phenomenon that proximate gasoline stations price very similarly in some markets, but very differently in other markets. Our analysis of product design and price competition between firms integrates two critical dimensions of heterogeneity across consumers: Consumers differ in their locations and in their travel costs, as in models of horizontal differentiation. They also differ in their relative preference or valuations for product quality dimensions, in terms of the offered station services (such as pay-at-pump, number of service bays or other added services), as in models of vertical differentiation. We find that the degree of local competitive intensity and the dispersion in consumer incomes are sufficient to explain variations in the product and pricing choices of competing firms. Closely located retailers who face sufficient income dispersion across consumers in a local market may differentiate on product design and pricing strategies. In contrast, retailers that are farther apart from each other may adopt similar product design and pricing strategies if the market is relatively homogeneous on income. Using empirical survey data on prices and station characteristics gathered across 724 gasoline stations in the St. Louis metropolitan area, and employing a multivariate logit model that predicts the joint probability of stations within a local market differentiating on product design and pricing strategies as a function of market demographics and local competitive intensity, we find strong support for the central implications of the theory.

Gender Differences in Ethics Judgment of Marketing Professionals in the United States

This empirical investigation reexamines the impact of gender on ethics judgment of marketing professionals in a cross-section of firms in the United States. In the study, gender differences in ethics judgment focus on decisions in the context of marketing-mix elements (product, promotion, pricing, and distribution). The results of statistical analyses indicate that men and women marketing professionals differ significantly in their ethics judgment. Overall, female marketing professionals evinced significantly higher ethics judgment than their male counterparts. Given the changing demographics of corporate America, it is conceivable that ethical decision-making in organizations stands to improve as the ratio of women in executive positions increases. The finding also bodes well with the recent emphasis of moving away from transaction-based in favor of relationship-focused conceptualization of marketing.     

MODEL UNCERTAINTY AND ITS IMPACT ON THE PRICING OF DERIVATIVE INSTRUMENTS

Uncertainty on the choice of an option pricing model can lead to "model risk" in the valuation of portfolios of options. After discussing some properties which a quantitative measure of model uncertainty should verify in order to be useful and relevant in the context of risk management of derivative instruments, we introduce a quantitative framework for measuring model uncertainty in the context of derivative pricing. Two methods are proposed: the first method is based on a coherent risk measure compatible with market prices of derivatives, while the second method is based on a convex risk measure. Our measures of model risk lead to a premium for model uncertainty which is comparable to other risk measures and compatible with observations of market prices of a set of benchmark derivatives. Finally, we discuss some implications for the management of "model risk."     

Transnational Pharmaceutical Corporations and Neo-Liberal Business Ethics in India

The author critiques the expedient application of market valuation principles by the transnational corporations and other large firms in the Indian pharmaceutical industry on a number of issues like patents, pricing, irrational drugs, clinical trials, etc. He contends that ethics in business is chiseled and etched within the confines of particular social structures of accumulation. An ascendant neo-liberal social structure of accumulation has basically shaped these firms' sharp opposition to the Indian Patents Act, 1970, government administered pricing, etc. The author contends that the practice of neo-liberal economics is strongly associated with a "one dimensional" ethics that privileges market valuation principles over all others. This seems to inevitably generate a social counter-movement that struggles for social protections. He critiques neo-liberal business practices from a perspective that derives from the work of the economic anthropologist Karl Polanyi. Before the present phase of liberalization in India, markets were "managed", but without a "welfare state" in place. Moving toward deregulation of the markets without a welfare state in place is unethical. Keeping the debilities of the institutional framework of public policy in mind, the author adopts a Polanyian perspective that places its trust and hope in the growing social legitimacy of the counter-movement in opposition to both neo-liberal business practices and the degenerate behavior of state agencies.