Cost-based Pricing Research Articles

Cost-based pricing for learning organizations – a model presentation and demonstration

A price can be set in different ways for a manufactured component, most commonly based on estimated manufacturing costs, market intelligence, and market adopted pricing or customer value. Pricing is one of the key factors when selecting subcontractors in the manufacturing sector. As a subcontractor, there are certain risks connected with pricing of a product, too low pricing leads to losses, whereas too high pricing can result in failure to receive orders. A model for cost-based pricing is developed and presented based on a cost-breakdown approach. Data from industry is used for both model demonstration and analyses of data accuracy.

Benefit analysis of service quality degradation: A case study of the tourism industry

During economic depression, improving profits to respond to the current economic crisis is highly crucial for both the regional and national tourism businesses. The operating cost structure of the tourism industry involves high fixed costs and low variable costs. Therefore, cost-based pricing cannot increase the profit of businesses in this industry; alternatively, value-based pricing is required to increase profits. According to the product quality discrimination model implemented in previous studies, artificially degrading the quality or functions of products enables businesses to register maximized profits. This paper examines the benefits of degrading hotel landscape service quality levels in the tourism industry in improving profits. The examination results reveal that when the market size remains unchanged and when the original quality level of high-quality services is maintained, quality discrimination enables businesses to improve their profits.

Promoting demand-based pricing

Applied economists have been trying to sell businesses on the value of demand-based pricing for many years. Their arguments promoting demand-based pricing have not been particularly persuasive and cost-based pricing continues to be a dominant price-setting method. This paper suggests four changes that may lead more firms to use demand principles when they set prices. Applied economists should acknowledge the benefits of other price-setting processes, shift their focus from profit-optimization to profit-improvement opportunities (e.g., increasing price so it is closer to the demand function), develop pricing heuristics that better meet firm needs, and add new pricing topics to classroom discussions.

Comparative Advantages and Demand in the New Competitive Ricardian Models

We survey the new Ricardian models of bilateral trade, which are seen as tractable structure for multi-country trade models addressing either cost or demand linkages to trade. Cost-based Ricardian models advance new forms of comparative advantages that are irrespective of autarky price and, in some cases, even of opportunity cost. A less noticed feature is their reliance in demand function that does not disturb cost-based prices. Demand-based Ricardian models hinge especially on non-homothetic preferences for asymmetric goods and the supply-side ordering of goods mirrors the demand-side ordering. We also critically discuss extensions of these latter competitive models to trade in quality. We further seek to identify all these models vis-à-vis the Ricardo–Haberler–Deardorff tradition. JEL: F10, 019, D5

Interactions between Market Reform and a Carbon Price in China’s Power Sector

The electricity sector accounts for a large share of China’s carbon dioxide emissions and of the economy-wide abatement potential. China’s planned national emissions trading scheme would include electricity generation, as nearly all emissions trading schemes do. The critical difference is that in most existing carbon pricing systems the power sector operates with competitive markets and cost-based pricing, while the Chinese power industry still uses a highly regulated dispatch and pricing system. Together these limitations mean that the effect of a carbon price on China is limited in terms of the impact on operational decisions for existing power stations and in terms of the effects on investment decisions. We explore the channels of interaction between electricity market reform and carbon pricing in China, and provide quantitative estimates of the effects and interactions on electricity sector emissions. A probabilistic discrete choice model is used to simulate the behavior of investors in the power sector. The analysis indicates that market reform can help reduce emissions intensity, but to meet China’s 2030 targets for non-fossil fuel generation a low to moderate carbon price is also necessary; conversely, a carbon price will only be effective with market reform that provides flexibility in dispatch. Using our simplified quantitative analysis, the carbon price required for the same share of non-fossil fuel generation would be about twice as high without market reform. Combining market reform and a carbon price could achieve significant rates of decarbonization and is likely to be the most effective and most feasibly policy package to cut emissions from China’s power sector.

Voltage-based reactive power pricing in deregulated environment using hybrid multi-objective particle swarm optimisation

ABSTRACTReactive power market management along with voltage stability is needed to maintain system reliability and to meet the required security levels in deregulated power system. This paper explores the technical and economic issues of reactive power pricing mechanism along with improvement in voltage stability in deregulated system. The algorithm proposes a multi-objective optimisation problem for minimising reactive power pricing and cost of energy loss along with voltage stability improvement using Hybrid Multi-Objective Particle Swarm Optimization . The voltage magnitude of generators, reactive power settings of shunt capacitors and the transformer tap settings are taken as the control variables. The proposed problem uses a well-defined reactive power-bid structure based on long-term capacity bids provided by the generators and capacitors to the system operator to ensure voltage security. The proposed cost-based pricing strategy along with stability enhancement has been implemented in IEEE 30-bus test system under normal and stressed system conditions.

PRICE-SETTING PRACTICES FOR NEW PRODUCT INTRODUCTIONS: EVIDENCE FROM BULGARIA

This paper presents the importance of the price-setting practices in the Bulgarian companies. According to the published research, the pricing, including that for the new products at their introduction into the market, is one of the most complex decisions in the company. When setting the price for a new product, the companies apply three price-setting practices: value-based pricing, competition-based pricing, and cost-based pricing. Results of empirical study amongst Bulgarian companies reveal that the most important price-setting factor for the tangible products are the prices of competitors’ products, and for the services - the fit between price and product parameters.

Bringing infrastructure into pricing in road freight transportation – A measuring concept based on navigation service data

Differences in road infrastructure, such as capacity, congestion, speed limits affect the productivity and the costs of short-distance freight operations. This article introduces a novel methodology that is based on navigation service data to measure the effects in terms of cost per kilometer using navigation and shipment data. The methodology is applied to five terminals of a forwarding cooperation and has been able to document significant differences in cost per kilometer across the terminals. The research results can be used by logistics service providers to better understand how productivity and thus profitability is affected by the quality of the transportation infrastructure in the particular areas they operate in. Furthermore, the insights will help these companies for better, i.e. cost-based pricing and will allow to document why and where prices need to be adapted.

Pricing strategies and levels and their impact on corporate profitability

Price policy definition is one of the most important decisions in management as it affects corporate profitability and market competitiveness. Despite the importance that prices take in organizations, it appears that this element has not received proper attention by many academics and marketers since it represents, according to estimates, less than 2% of the papers on leading journals in the field. Thus, the aim of this study was to propose and test a theoretical model showing the impacts of pricing policy on corporate profitability. To this end, 150 companies in the metal-mechanic sector situated in the Northeast of Rio Grande do Sul State, Brazil were studied, integrating customer value-based pricing strategies, competition-based pricing strategies and cost-based pricing strategies with price levels (high and low) and performance with respect to profitability. The results indicate that the profitability of the surveyed companies is positively affected by value-based pricing strategy and high price levels while it is negatively affected by low price levels. Such findings indicate that pricing policies influence the profitability of organizations and therefore, a more strategic look at the pricing process may constitute one aspect that cannot be overlooked by managers.

Import Substitution in the Russian AgroFood Market

The article analyzes the dependence of Russian agriculture on imported components, and the conditions for the effective functioning of the agricultural sector capable of providing import substitution. The particular features of the development of production on the basis of domestic and borrowed innovation are considered, as well as the availability of resources and measures for import substitution in the agrofood market. A method for cost-based product price calculation is proposed, which incorporates foreign exchange rate fluctuations. Farmers’ views on factors influencing the agricultural situation are presented. Finally, the article describes the potential and conditions for providing food import substitutions.

Medco's Transition to a Transparent Business Model

In an effort to make its business model more transparent, Medco Health Solutions, the second largest independent pharmacy benefit manager, first disclosed in 3Q2004 that its rebate retention rate was 40.5%.In the nine months since disclosure, Medco has allowed its rebate retention rate to drop to 28.1% and it has seen its rebate share of gross profits decline from 71.7% to 48.0%. Yet, Medco has been able to maintain its overall gross profit margin by moving toward cost-based pricing for its captive mail order operations and claims processing.

Street Vending and Competitive Advantage: Towards Building a Theoretical Framework

The study examines the strategies adopted by street vendors or hawkers in Ghana in a bid to gain competitive advantage. Drawing on six focus group meetings held with street vendors in two sub-metropolitan assemblies (Bantama and Tafo) in Kumasi, Ghana, the study finds that street vendors adopt ten strategies – networking, multiple undifferentiated market strategy, the sale of convenient products, “dying and resurrecting” (strategic exit and return into business), regular changing of goods and services, exploitation of flexible operating hours, cost-based pricing strategy, sales promotion, trade credit and locational advantage – to gain competitive advantage. Using these strategies, a theoretical framework for street vendors’ competitive strategies is developed.

Sustainable Financing of Innovative Therapies: A Review of Approaches.

The process of innovation is inherently complex, and it occurs within an even more complex institutional environment characterized by incomplete information, market power, and externalities. There are therefore different competing approaches to supporting and financing innovation in medical technologies, which bring their own advantages and disadvantages. This article reviews value- and cost-based pricing, as well direct government funding, and cross-cutting institutional structures. It argues that performance-based risk-sharing agreements are likely to have little effect on the sustainability of financing; that there is a role for cost-based pricing models in some situations; and that the push towards longer exclusivity periods is likely contrary to the interests of industry.

How should urban water be priced? – An empirical analysis for the city of Mekelle, Ethiopia

Urban water utilities have focused on setting water prices to cover average costs, usually using increasing block rate designs. In an attempt to contribute to the use of efficient, equitable, and revenue-sufficient pricing, this paper estimates the long-run marginal and average social costs of water supply in Mekelle city using a multi-product translog cost function that incorporates the shadow price of natural water. Findings show that the marginal social costs of providing one m3 of residential and non-residential water are Birr 5.33 and 7.71 (Birr = Ethiopian currency: 1 Euro ≈ 23 Birr), respectively, while the average current prices are Birr 4.46 and 6.10/m3. On the other hand, the average social costs of residential and non-residential water are estimated at Birr 14.34 and 16.36/m3, respectively, implying that marginal social cost-based prices would still lead to a revenue deficit of approximately Birr 9/m3.

Influential factors in the design of port infrastructure tariffs

ABSTRACTThe main aim of this article is to examine the factors influential to the practical process of port infrastructure tariff design. The analysis is based on the survey data of 67 seaports representing the Australasian, East Asian, European, North American and South American regions. Exploratory factor analysis (EFA) was first carried out to identify the factors influential to the selection of the infrastructure tariff design model. Subsequently, confirmatory factor analysis (CFA) was used to confirm the relationship between the variables. The findings showed that demand, knowledge about pricing theories, the dynamics of port and shipping sectors (including competition and ship size), pricing objectives and port cost consideration are influential factors in infrastructure tariff design. Most ports use a mix of pricing approaches including price discrimination, cost-based pricing and market-based pricing. Ports are aware of the basic pricing approaches but have limited knowledge of their application. Based on the results of analysis, policy implications for port management in designing port infrastructure tariffs, limitations and recommendations for future research are discussed.

Import substitution in the russian agri-food market: Expectations and capabilities

Problems of national farm industry dependence on imported agricultural components are shown in the article. Conditions for the effective agro-industrial complex operation, capable to provide import substitution are analyzed. Special aspects of both national-based and foreign-based innovations production development are emphasized. Availability of resources and measures to ensure import substitution on the agri-food market are considered. The method for cost-based product price calculation is proposed taking into account fluctuations of the foreign currency. Farmers’ views on factors determining the situation in agriculture are presented. To sum it up, potential capacity and conditions providing food import substitution are determined.

Early contractor involvement in framework contracts

Early contractor involvement (ECI) has been used for construction procurement in about 30 countries. The reasons for its adoption include collaboration, integration of design and construction, value for money and utilisation of market capacity. At least two models of ECI are reported in the literature. A different model of ECI has been used in framework contracts at Wits University in South Africa. The research aim was to analyse how this type of ECI works and its value to the success of projects. Data were collected through ten interviews, documentary analysis and observation of one ECI session. Through framework agreements, an opportunity is created to have ECI. Once concept designs and elemental cost estimates are prepared, the contractor is brought in to assist with value-engineering of the design and production drawings. ECI produced 12% cost savings in one project and 32% in another. Team integration and ECI are supported by framework agreements and NEC contracts. Although contractors receive no remuneration for the involvement in design development, they value the benefits of developing early cost models and production plans. Conditions for successful adoption are an intelligent client, a framework agreement, collaborative contracts, cost-based pricing strategies, the professional team’s flexibility and a committed contractor.

Is Swedish district heating operating on an integrated market? – Differences in pricing, price convergence, and marketing strategy between public and private district heating companies

The deregulation of the Swedish electricity market in 1996 made it possible to operate municipal district heating commercially. Until that time district heating had been organized mainly as municipal utilities. After 1996 district heating is instead expected to function on a market. In competitive and integrated markets, prices are expected to be equal, or converging. To find out if district heating operates on an integrated market the differences in price levels, price convergence, price strategy, and business goals, among municipal, private and state owned district heating companies are investigated.Price statistics was used along with results from a questionnaire that was answered by representatives for 109 Swedish district heating companies. The results show that prices among district heating systems do not converge significantly and that variations in prices among municipal systems are larger than among private and state owned systems. Furthermore, despite the fact that district heating is supposed to be commercial, a vast majority of district heating companies apply cost-based pricing and not market pricing. The municipal companies give priority to political goals before financial goals. The conclusion is that a Swedish integrated market for heat has not yet evolved, and some district heating price-controlling mechanism is necessary.

Islanding and Scheduling of Power Distribution Systems With Distributed Generation

This paper presents a short-term power regulation mechanism for post-segmentation power distribution systems in the presence of severe fault or large disturbance. Firstly, load priority is introduced into system separation and centroids of load clusters are allocated at nodes with distributed sources, respecting power balance and network connectedness. Secondly, fast power flow calculation is performed on the primarily formed islands to resolve load interruption for operational feasibility of partitions from power quality perspective. Then the effect of distributed generation fluctuations on durable operation of subsystems with various optimization objectives is examined. The load response is instructed by the proposed cost-based pricing scheme contemplating consumers' willingness. In addition, the influence of network congestion and load controllability on results of economic scheduling is investigated. Numerical results from the PG&E-69 distribution system are used to show the effectiveness of the developed model in radial structure load clusters. Illustration on the IEEE 118-bus case further proves its robustness and practicability for other distribution systems applications. This property is also useful for transmission switching and micro-grid applications.

A Case Study of Pharmaceutical Pricing in China: Setting the Price for Off-Patent Originators.

This article aims to define a value-based approach to pricing and reimbursement for off-patent originators using a multiple criteria decision analysis (MCDA) approach centered on a systematic analysis of current pricing and reimbursement policies in China. A drug price policy review was combined with a quantitative analysis of China’s drug purchasing database. Policy preferences were identified through a MCDA performed by interviewing well-known academic experts and industry stakeholders. The study findings indicate that the current Chinese price policy includes cost-based pricing and the establishment of maximum retail prices and premiums for off-patent originators, whereas reference pricing may be adopted in the future. The literature review revealed significant differences in the dissolution profiles between originators and generics; therefore, dissolution profiles need to be improved. Market data analysis showed that the overall price ratio of generics and off-patent originators was around 0.54–0.59 in 2002–2011, with a 40 % price difference, on average. Ten differentiating value attributes were identified and MCDA was applied to test the impact of three pricing policy scenarios. With the condition of implementing quality consistency regulations and controls, a reduction in the price gap between high-quality off-patent products (including originator and generics) seemed to be the preferred policy. Patents of many drugs will expire within the next 10 years; thus, pricing will be an issue of importance for off-patent originators and generic alternatives.