Pricing Methodology Research Articles

Bilevel low-carbon coordinated operation of integrated energy systems considering dynamic tiered carbon pricing methodology

The coordinated operation and management of energy and carbon emissions in an integrated energy system (IES) can effectively promote overall energy efficiency and reduce carbon emissions. However, allocating carbon emission responsibilities between transmission-level integrated energy system (TIES) and regional integrated energy system (RIES) is difficult. On the basis of carbon emission flow theory, a model for allocating carbon emission responsibility for IES is developed in this paper. Moreover, the Shapley value method is adopted to obtain the carbon emissions responsibility intervals at the RIES. A dynamic tiered carbon pricing methodology is proposed for the RIES on the basis of equitable carbon emission responsibility intervals. In addition, a bilevel coordinated operation model that imposes carbon price to more fully excavate the low-carbon benefits obtained from operating an IES is proposed. The upper-level model, namely, the TIES, explores the optimal low-carbon schedule for energy networks by imposing fixed carbon price on the energy production costs. The lower-level model, namely, the RIES, investigates the optimal low-carbon energy supply scheme of multienergy coupling equipment and imposes dynamic tiered carbon pricing to adjust the amount of electricity and natural gas consumed. After the whole bilevel model is solved iteratively, equilibrium is reached. Case studies verify the potential and efficacy of the proposed bilevel model, demonstrating superior effectiveness in reducing carbon emissions compared with existing methods.

Pillar One, Amount B: The First Step towards a More Modern Transfer Pricing Practice: What Is Next?

In February 2024, the OECD published the final version of the Amount B report. This article examines the extended definitive scope of Amount B, also outlining its evolution across the various drafts of the report over time. The article also analyses (i) the main implications of the new guidance included in the report on the transfer pricing methodologies currently in use, focusing in particular on the so-called “pricing matrix”, and (ii) the legal basis chosen for the adoption of Amount B in comparison with that for the remainder of Pillar One.

DEMPE – Still a Long Way to Go

An integral part of the BEPS Action Plan is the Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) concept, which is intended to ensure a fair allocation of profits stemming from transactions that involve intangible assets. However, even though the DEMPE concept was included in the OECD Transfer Pricing Guidelines, its impact on the activities and profits of MNEs remains unclear. A survey conducted in 2023 revealed differing attitudes to the impact of DEMPE on MNEs’ income distribution and business operations, indicating a growing awareness of the concept but also highlighting the importance of clearer guidance on its application and integration with existing transfer pricing methodologies.

Pricing of insurance-linked securities: a multi-peril approach

In this paper we build a methodology for pricing of insurance-linked securities which are tied to multiple natural catastrophe perils. As a representative example, we construct a multi-peril catastrophe (CAT) bond which can be linked to the industry loss indices or actual losses incurred by an insurer. We provide pricing formulas for such CAT bonds. We illustrate the introduced methodology on the US natural catastrophe data obtained from Property Claim Services (PCS). Within this dataset, we specifically examine two types of risks: losses associated with wind and thunderstorm events, and those linked to winter storm events. Then, we fit and validate the underlying compound non-homogeneous Poisson processes taking into account the fact that the data are left-truncated. The best fitted loss distributions appear to be Burr and Generalised Extreme Value and for the first peril and log-normal for the second. Finally, we visualise the zero-coupon CAT bond prices for the selected best-fitted models.

Pricing cryptocurrency options with machine learning regression for handling market volatility

Pricing cryptocurrency options, crucial for risk management and market stabilization, presents unique challenges due to specific underlying dynamics like the inversion of the leverage effect. Classical option pricing models like Black–Scholes and Heston struggle to address these dynamics due to their set of assumptions. This study introduces machine learning models for options pricing, specifically regression-tree methods. A data-driven machine learning model can incorporate high-frequency volatility estimators into the input set to enhance pricing accuracy. By integrating these estimators, machine learning models can capture the complex dynamics of cryptocurrency markets more effectively than classical pricing approaches. The comparative analysis reveals that equity options are easier to price, clearly indicating inefficiencies in the cryptocurrency option market, which confirms the challenges in achieving accurate pricing. Our results highlight the effectiveness of machine learning models in adapting to the unique characteristics of emerging asset classes, suggesting a shift towards more data-oriented pricing methodologies

Research of Park and Ride Parking Spaces Tiered Pricing Methodology Based on Subway Ride Distance

Park and Ride (P&R) as a demand management tool has the effect of reducing traffic congestion in urban centers, saving energy and reducing pollutant emissions. Since 2000, many cities in China have been constructing P&R facilities, which have partially alleviated urban traffic congestion and provided a time-reliable mode of travel for commuters heading to urban centers. However, in recent years, due to the pricing policy of the P&R facility, there has been an insufficient supply of P&R facilities in many places. In fact, the P&R system prefers to welcome travelers who make long-distance subway rides and does not want those who make short-distance subway rides to occupy more parking spaces. To address this, this paper proposes a tiered pricing strategy that considers charging parking fees based on the distance traveled by commuters after switching to public transportation, to improve the utilization of P&R. That is, charge less for parking for long-distance subway riders and more for short-distance subway riders. Firstly, based on questionnaire data from SP surveys, a fixed pricing mixed logit model (FP model) and a tiered pricing mixed logit model (TP model) for P&R facilities are constructed. Utilizing two models, we explored the mechanisms underpinning traveler’s mode choice influenced by daily habits and travel considerations through the comparison of the two models to validate the effectiveness of the tiered pricing for P&R facilities. The study found that the implementation of a tiered pricing method for P&R facilities increases its attractiveness to long-distance subway ride travelers, resulting in a higher proportion of long-distance subway riders among P&R commuters. In the study’s last section, a marginal effect analysis was conducted on the per-kilometer cost (Pkm) within the P&R model. This analysis determined the optimal Pkm for three subway travel distances within the P&R model. Consequently, it calculated the corresponding P&R parking fees for these three subway travel distances. Additionally, we have predicted the implementation effects of the tiered pricing scheme.

Assessing Arm’s Length Guarantee Fee: Insights from the Crédit Industriel et Commercial Case

In a context where more and more tax disputes relate to intercompany financial guarantees, this article analyses the Crédit Industriel et Commercial case and its practical implications. This decision highlights certain divergences that can arise between taxpayers and tax authorities when defining an arm’s length guarantee fee. In this case, such differences revolved around both the delineation of the guarantee and the appropriate pricing methodology.

A comprehensive value-based method for new nuclear medical service pricing: with case study of radium [223Ra] bone metastases treatment

ImportanceInnovative nuclear medicine services offer substantial clinical value to patients. However, these advancements often come with high costs. Traditional payment strategies do not incentivize medical institutes to provide new services nor determine the fair price for payers. A shift towards a value-based pricing strategy is imperative to address these challenges. Such a strategy would reconcile the cost of innovation with incentives, foster transparent allocation of healthcare resources, and expedite the accessibility of essential medical services.ObjectiveThis study aims to develop and present a comprehensive, value-based pricing model for new nuclear medicine services, illustrated explicitly through a case study of the radium [223Ra] treatment for bone metastases. In constructing the pricing model, we have considered three primary value determinants: the cost of the new service, associated service risk, and the difficulty of the service provision. Our research can help healthcare leaders design an evidence-based Fee-For-Service (FFS) payment reference pricing with nuclear medicine services and price adjustments.Design, setting and participantsThis multi-center study was conducted from March 2021 to February 2022 (including consultation meetings) and employed both qualitative and quantitative methodologies. We organized focus group consultations with physicians from nuclear medicine departments in Beijing, Chongqing, Guangzhou, and Shanghai to standardize the treatment process for radium [223Ra] bone metastases. We used a specially designed ‘Radium Nuclide [223Ra] Bone Metastasis Data Collection Form’ to gather nationwide resource consumption data to extract information from local databases. Four interviews with groups of experts were conducted to determine the add-up ratio, based on service risk and difficulty. The study organized consultation meeting with key stakeholders, including policymakers, service providers, clinical researchers, and health economists, to finalize the pricing equation and the pricing result of radium [223Ra] bone metastases service.Main outcomes and measuresWe developed and detailed a pricing equation tailored for innovative services in the nuclear medicine department, illustrating its application through a step-by-step guide. A standardized service process was established to ensure consistency and accuracy. Adhering to best practice guidelines for health cost data analysis, we emphasized the importance of cross-validation of data, where validated data demonstrated less variation. However, it required a more advanced health information system to manage and analyze the data inputs effectively.ResultsThe standardized service of radium [223Ra] bone metastases includes: pre-injection assessment, treatment plan, administration, post-administration monitoring, waste disposal and monitoring. The average duration for each stage is 104 min, 39 min, 25 min, 72 min and 56 min. A standardized monetary value for medical consumables is 54.94 yuan ($7.6), and the standardised monetary value (medical consumables cost plus human input) is 763.68 yuan ($109.9). Applying an agreed value add-up ratio of 1.065, the standardized value is 810.19 yuan ($116.9). Feedback from a consultation meeting with policymakers and health economics researchers indicates a consensus that the pricing equation developed was reasonable and well-grounded.ConclusionThis research is the first study in the field of nuclear medicine department pricing methodology. We introduce a comprehensive value-based nuclear medical service pricing method and use radium[223Ra] bone metastases treatment pricing in China as a case study. This study establishes a novel pricing framework and provides practical instructions on its implementation in a real-world healthcare setting.

Study on distributed renewable energy generation aggregation application based on energy storage

As large amounts of distributed renewable energy generation (DREG) replace conventional generating units on the grid, the tension between the supply lack of flexible resources and the increased demand for flexible resources on the grid intensifies. To address this issue, this paper focuses on distributed renewable energy generation aggregation (DREGA) applications based on energy storage systems (ESS). Considering the interconnection and supply–demand coupling between generation and consumption in the grid, ESS is used to flexibly regulate the flow of electrical energy between producers and consumers in DREGA. A pricing methodology that takes into account aggregation differences and real-time changes based on supply and demand is developed. This method mobilizes resources within the aggregator to help the network operator balance supply and demand through price incentives. Electricity is shared directly between producers and consumers within the aggregation, in addition to indirectly shared through ESS. It improves the self-consumption of renewable energy and the self-supply rate of users from the perspective of aggregators. The validity of the proposed method is proven by case study results.

Affordability of Paediatric Oral Anti-Infective Medicines in a Selected District, Sri Lanka

In this cross-sectional descriptive study conducted in the Ratnapura district, Sri Lanka, we assessed the affordability of oral pediatric anti-infective medicines (OPAIMs). Using a modified WHO/HAI medicinal price methodology, we examined the availability, median price ratios (MPRs), mean percentage difference, and affordability of the standard treatment of the originator brand (OB) and lowest-priced generic (LPG) OPAIMs in 30 private and 2 state-owned pharmacies. The study revealed disparities in availability, with only 50% of private pharmacies offering all 11 medicinal drugs in their generic form. The MPRs of OPAIMs for OB and LPG varied, with three drugs exceeding the financially acceptable MPR of 2 (albendazole, amoxicillin, and erythromycin). The standard treatment with LPGs costs between 0.17 and 0.85 and between 0.06 and 0.28 days’ wages for the lowest daily salary of the private sector and unskilled public employees, respectively. We identified erythromycin and albendazole as having less than 50% availability in their generic form in private pharmacies. To address these findings, we recommend frequent pricing revisions based on exchange rates and associated costs, coupled with the establishment of a transparent scientific criterion to subsidize essential medicines deemed “unaffordable.” Failure to implement such measures amidst economic crises may adversely impact financial access to essential medications.

The Key Factors Driving Low Participation in the Enhancing Oncology Model

This study investigates the challenges leading to a substantial de­cline in participation among academic oncology practices within the Enhancing Oncology Model (EOM), introduced as a successor to the Oncology Care Mod­el (OCM) by the CMS Innovation Center. Analyzing the withdrawal of 14 practic­es from the EOM, previously part of the OCM Collaborative, three primary factors are identified: immediate downside risk in a context of narrow provider margins, inadequate risk adjustment failing to appropriately account for drug costs, and onerous reporting burdens for extensive clinical data. Under the EOM, immedi­ate downside risk for seven specified cancers diverged significantly from the OCM’s upside-only risk structure, posing financial challenges for practices. Inad­equate risk adjustment, particularly the omission of crucial clinical data, raised concerns about the model’s focus on drug costs without considering essen­tial patient-specific variables. The study also highlights the burden of reporting requirements, exacerbated by reduced enhanced services payments, impacting practices financially. To address these challenges and encourage EOM participa­tion, policy options are proposed. These include reconsidering financial risk lev­els, refining target price methodology to incorporate clinical data, and reducing reporting burdens by aligning data requirements with EOM financial and quality methodologies. These adjustments aim to strengthen the EOM, fostering more accurate performance measurement and incentivizing high-quality patient care delivery in oncology practices.

The Financial Market of Indices of Socioeconomic Well-Being

This study discusses how financial economic theory and its quantitative tools can be applied to create socioeconomic indices and develop a financial market for the so-called “socioeconomic well-being indices”. In this study, we quantify socioeconomic well-being by assigning a dollar value to the well-being factors of selected countries; this is analogous to how the Dow 30 encapsulates the financial health of the US market. While environmental, social, and governance (ESG) financial markets address socioeconomic issues, our focus is broader, encompassing national citizens’ well-being. The dollar-denominated socioeconomic indices for each country can be viewed as financial assets that can serve as risky assets for constructing a global index, which, in turn, serves as a “market of well-being socioeconomic index”. This novel global index of well-being, paralleling the Dow Jones Industrial Average (DJIA), provides a comprehensive representation of the world’s socioeconomic status. Through advanced financial econometrics and dynamic asset pricing methodologies, we evaluate the potential for significant downturns in both the socioeconomic well-being indices of individual countries and the aggregate global index. This innovative approach allows us to engineer financial instruments akin to portfolio insurance, such as index puts, designed to hedge against these downturn risks. Our findings propose a financial market model for well-being indices, encouraging the financial industry to adopt and trade these indices as mechanisms to manage and hedge against downturn risks in well-being.

Operation and evaluation of digitalized retail electricity markets under low-carbon transition: recent advances and challenges

With the growth of electricity consumers purchasing green energy and the development of digital energy trading platforms, the role of digitalized retail electricity markets in the low-carbon transition of electric energy systems is becoming increasingly crucial. In this circumstance, the research work on retail electricity markets needs to be further analyzed and expanded, which would facilitate the efficient decision-making of both market players and policymakers. First, this paper introduces the latest developments in the retail electricity market under low-carbon energy transition and analyzes the limitations of the existing research works. Second, from three aspects of power trading strategy, retail pricing methodology, and market risk management, it provides an overview of the existing operation and mechanism design strategies of the retail electricity market; then, it provides a systematic introduction to the evaluation system and monitoring methodology of electricity markets, which is not sufficient for the current digitalized retail electricity markets. Finally, the issues regarding operation evaluation and platform optimization of the current digitalized retail electricity market are summarized, and the research topics worth further investigations are recommended.

Safe Harbor Regimen in Transfer Pricing—An African Perspective

The transfer pricing methods established by the transfer pricing rules and practices of many countries (generally modelled after the OECD Transfer Pricing Guidelines) are not only complex to implement, but also fraught with challenges such as the lack of availability of comparables for benchmarking purposes, low accessibility of databases and the failed capacity of tax authorities to implement them. For tax authorities in African countries, these challenges are further amplified, for example, by lack of resources, especially human and capital, and a shortage of experience in applying transfer pricing rules. As a result of these challenges, achieving arm’s length prices for transactions between related entities has posed a significant burden and cost to both taxpayers and tax authorities. The OECD and the G20 initiated the Base Erosion and Profit Shifting (BEPS) project to ameliorate some of the challenges listed above and to address the erosion of tax bases and shifting of profit to low-tax jurisdictions—challenges ultimately tied to the limitations of the arm’s-length standard and application of transfer pricing methodologies. However, tax authorities in some jurisdictions already apply safe harbors and other simplified measures to mitigate the challenges of applying transfer pricing rules and practices. These measures reduce the need for taxpayers to prepare detailed transfer pricing documentation in justifying the arm’s-length price fixed for goods and services transferred among related entities. They also remove the need for tax authorities to audit the books of taxpayers where they act within approved margins. In some cases, they exempt taxpayers from applying transfer pricing rules to related-party transactions. Historically, the OECD discouraged the use of safe harbors by tax jurisdictions, claiming that they conflict with the arm’s length standard. In recent times, the OECD has changed its views on the use of safe harbors. The Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy recommends the use of safe harbors, including those in the GloBE rules, in determining marketing and distribution profits. Given the positive recommendation by the OECD on the use of safe harbors in recent times, this Article analyzes the adoption and application of safe harbor regimes by certain countries and discusses how they should be designed. It recommends the cautious adoption and application of safe harbor regimes by tax authorities in African countries to achieve increased revenue collection, tax efficiency, certainty, simplicity and convenience, and to circumvent the complicated comparability analysis.

Improvement of pricing on the market of organic products

Modern organic agriculture is increasingly gaining momentum against the background of worsening economic, social and environmental problems. In recent years, interest in environmentally friendly production has been growing in many areas. In particular, agriculture in this direction satisfies the needs of mankind for quality products and has a positive effect on restoring the natural fertility of the soil, which contributes to the maintenance of the natural balance. The purpose of this study is to analyze the pricing process on the market of organic products and the justification of recommendations for improving the pricing methodology and determining the equivalent price for organic agricultural products. The work uses: dialectical method, methods of systematic and comparative analysis, economic-statistical and graphic methods, methods of computer information processing. It has been established that the leaders of organic agriculture are countries that have formed systemically influential supranational institutions and societies. When comparing the economic efficiency of production, it was determined that an agricultural enterprise with the production of organic products receives less gross production, net income and profit per 1 ha of farmland than conventional ones. The price analysis of the organic market in Ukraine revealed the need to modify generally accepted approach to pricing. The proposed equivalent price can be a guideline for improving the price policy in organic production.

Pillar One, Amount B: Current Implications and Future Perspectives

On 17 July 2023, the OECD released an updated version of the Amount B draft report for public consultation. This article examines the current extended scope of Amount B, analysing the main implications on the transfer pricing methodologies – especially the TNMM – and explores, among others by means of numeric examples, the broader implications of Amount B, should the scope be further enlarged in the future. Some broader issues about the interactions between Amount B and Amount A under Pillar One are also addressed.

Assessing the potential for a levy-based system to replace revenue from trophy hunting in South Africa

Trophy hunting is a contentious practice often associated by the public with charismatic African megafauna, especially lions (Panthera leo). Public pressure could potentially end trophy hunting in the near future, which many stakeholders argue could lead to negative impacts, including on species conservation and on the livelihoods of communities that depend upon it as a source of income. We investigated the potential for replacing revenue currently generated by trophy hunting in South Africa with levies - a “lion protection fee” - on international travellers to that country. Our approach recognised tourism as a source of funds for conservation action, and the influence of lions as a charismatic, flagship species. We surveyed 907 respondents who had previously visited South Africa, or would consider visiting in the future. We used van Westendorp and Gabor-Granger direct pricing methodologies to assess whether the willingness of potential visitors to pay for wildlife protection could be sufficient to compensate for any loss were trophy hunting to be banned. Our findings indicated substantial support for the proposition of being charged a “lion protection fee”: 84.2% of respondents stated that it was a “great” or a “good” idea. A minority (7.5%) had a negative view but only two of these respondents (0.2%) indicated a pro-trophy hunting attitude. Willingness-to-pay was sufficient that, under predicted 2023 numbers of tourists, daily fees could be set at a price acceptable to both overseas ($6–7 USD) and southern African tourists ($3–4 USD), and generate funds at least equalling, but potentially exceeding, those currently generated by trophy hunting ($176.1 million US per annum). We conclude that, in principal, revenue from trophy hunting in South Africa could be fully replaced by a subsidy to stakeholders as a payment for conservation action, funded by a modest levy on international tourist visitors.

Supreme Administrative Court Decision on Intra-Group Services Involving the Stock Spirit Group

This article provides some insights into the methodological approach of the Czech judiciary in the example of the Stock Spirits Group case involving intra-group services, including consulting services remunerated with a feature resembling a profit split method, charges made for support services and the recharge of services from third parties related to the refinancing of the loan. The key issue of dispute was the burden of proof on the taxpayer to establish that the services can be deducted for tax purposes, rather than the specific transfer pricing methodology.

Carbon Emissions and Stock Returns: The Case of Russia

Russia is taking the first steps in the formation of an emissions trading system. In this article, we studied the impact of carbon risk on Russian stock returns. We link carbon risk to CO2 emissions and air protection costs. We suggest that carbon firms are exposed to carbon risk and hence require a premium in stock returns. We use an approach based on the asset pricing methodology for carbon, carbon-free, and “carbon-minus-carbon-free” portfolios. Based on the Newey–West estimate, we perform a linear regression analysis for the period from January 2014 to December 2021. We find a positive and statistically significant carbon premium. This means that carbon firms show higher expected returns. Carbon risk does not have a statistically significant impact on the carbon premium. The carbon firms’ stock returns are not sensitive to CO2 emissions and air protection costs. Our analysis shows that a quarter of the carbon premium is explained by the market premium and is not sensitive to size, value, and momentum premiums. Our results inform policymakers and investors about the implications of environmental regulation. Policymakers should take into account the results obtained in the development of national climate and, in general, environmental policies.

Deep Equal Risk Pricing of Financial Derivatives with Non-Translation Invariant Risk Measures

The objective is to study the use of non-translation invariant risk measures within the equal risk pricing (ERP) methodology for the valuation of financial derivatives. The ability to move beyond the class of convex risk measures considered in several prior studies provides more flexibility within the pricing scheme. In particular, suitable choices for the risk measure embedded in the ERP framework, such as the semi-mean-square-error (SMSE), are shown herein to alleviate the price inflation phenomenon observed under the tail value at risk-based ERP as documented in previous work. The numerical implementation of non-translation invariant ERP is performed through deep reinforcement learning, where a slight modification is applied to the conventional deep hedging training algorithm so as to enable obtaining a price through a single training run for the two neural networks associated with the respective long and short hedging strategies. The accuracy of the neural network training procedure is shown in simulation experiments not to be materially impacted by such modification of the training algorithm.