The Impact of Cost Based Pricing Rules on Capacity Planning Under Uncertainty

Download or read book The Impact of Cost Based Pricing Rules on Capacity Planning Under Uncertainty written by Robert F. Göx and published by . This book was released on 2002 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the efficiency of three simple cost based pricing heuristics in a two-period capacity planning model with uncertain demand. All policies start with full cost introductory prices but differ with respect to second period pricing. Under quot;adaptive full cost pricingquot; the firm updates second period prices on the basis of current demand conditions and full unit costs, whereas under quot;wait and see pricingquot; second period prices are set on the basis of updated demand information and current opportunity cost of capacity. Finally, under quot;myopic full cost pricingquot; prices remain constant for both periods. Although we identify one special case for which all three heuristics exactly replicate the optimal solution, we find that quot;wait and see pricingquot; dominates quot;adaptive full cost pricingquot;, while the quot;adaptivequot; version of full cost pricing dominates its quot;myopicquot; counterpart. However, we also discuss some factors that may justify the use of quot;full cost pricingquot; in real world planning environments. In particular, if the firm faces significant information and/or communication costs, or if price changes are only likely to occur in the far future, even the simple quot;myopic full cost pricingquot; heuristic may be a reasonable policy.