The Method of the Base Price Indexing: Incentive Model of Pricing for Products Supplied under the State Defense Order

Abstract

The article is devoted to the method of the base price indexing a rather new pricing method for products supplied under the state defense order. The main features of this method are legal conditions of use and indexing the whole price according to the name. The method of the base price indexing is considered as an alternative to the costly method, which is mainly used for contracting by the only supplier. The method of the base price indexing is considered as an incentive, it causes the supplier to reduce costs. According to the costly method of pricing, the profit is calculated as 1 percent of cost of materials, components and services and 20 percent of other costs. So, it is supposed that the supplier is not interested in cost reduction as the sum of profit depends on sum of costs. The method of the base price indexing assumes no decomposition by cost items and in the same time the method guarantees the right to maintain additional profits, earned by costs reduction. The paper simulates pricing by the method of the base price indexing and by the costly method. The purpose of the study is identifying additional profit opportunities as the main motivator for suppliers when concluding contracts with pricing by the method of the base price indexing. The conclusion is the suppliers using the method of the base price indexing are interested in costs reduction rather because of the need to maintain the profitability available by the costly method than to earn any additional profit.