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The impact of cost based pricing rules on capacity planning under uncertainty


Göx, Robert (2001). The impact of cost based pricing rules on capacity planning under uncertainty. Schmalenbach Business Review (sbr), 53(3):197-228.

Abstract

This paper analyzes the efficiency of three simple cost-based pricing heuristics in a twoperiod capacity planning model with uncertain demand. All policies start with full cost introductory prices but differ in second-period pricing. Under “adaptive full-cost pricing”, the firm updates second-period prices on the basis of current demand conditions and full unit costs. Under “wait-and-see pricing”, the firm sets second-period prices on the basis of updated demand information and current opportunity cost of capacity. Under “myopic fullcost pricing”, prices remain constant for both periods. Although we identify one special case for which all three heuristics replicate the optimal solution, we find that “wait-and-see pricing” dominates “adaptive full-cost pricing”, which dominates its ‘myopic’ counterpart. However, we also discuss factors that may justify the use of ‘full-cost pricing’ in real-world planning environments. We note that if the firm faces significant information and/or communication costs, or if price changes will probably only occur in the far future, even the simple “myopic full-cost pricing” heuristic may be a reasonable policy.

Abstract

This paper analyzes the efficiency of three simple cost-based pricing heuristics in a twoperiod capacity planning model with uncertain demand. All policies start with full cost introductory prices but differ in second-period pricing. Under “adaptive full-cost pricing”, the firm updates second-period prices on the basis of current demand conditions and full unit costs. Under “wait-and-see pricing”, the firm sets second-period prices on the basis of updated demand information and current opportunity cost of capacity. Under “myopic fullcost pricing”, prices remain constant for both periods. Although we identify one special case for which all three heuristics replicate the optimal solution, we find that “wait-and-see pricing” dominates “adaptive full-cost pricing”, which dominates its ‘myopic’ counterpart. However, we also discuss factors that may justify the use of ‘full-cost pricing’ in real-world planning environments. We note that if the firm faces significant information and/or communication costs, or if price changes will probably only occur in the far future, even the simple “myopic full-cost pricing” heuristic may be a reasonable policy.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2001
Deposited On:05 Jul 2013 07:03
Last Modified:05 Apr 2016 16:51
Publisher:Schmalenbach-Gesellschaft für Betriebswirtschaft
ISSN:1439-2917
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.sbr-online.de/pdfarchive/zs/zs_sbr_2001_july-197-228.html
Related URLs:http://www.sbr-online.de/home.html
Other Identification Number:merlin-id:8242

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