A cost-plus trap: Pricing heuristics and demand identification |
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Authors: | Ward A Hanson Kirthi Kalyanam |
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Institution: | (1) Krannert School of Management, Purdue University, 1310 Kranert Building, 47907-1310 West Lafayette, IN;(2) Leavey School of Business, Department of Marketing, Santa Clara University, 95053 Santa Clara, CA |
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Abstract: | 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.![rdquo](/content/q5081r55047q6v62/xxlarge8221.gif) |
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Keywords: | pricing cost plus Bayesian decisions non-nested models |
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