Pricing Techniques Research Articles

How pricing of business intelligence and analytics SaaS applications can catch up with their technology

Purpose – The purpose of this paper is to investigate the development of software pricing, following the advent of cloud-based business intelligence & analytics (BI & A) Software. A value-based conceptual software model is developed to ignite and structure further research. Design/methodology/approach – A two-step research approach is applied. In step one, the available literature is screened and evaluated, and this is followed by ten semi-structured expert interviews. With that input, a conceptual software pricing model is designed. In step two, this model is validated and refined through discussions with representatives of the five leading business intelligence suites. Findings – The paper sheds light on the value perception of customers and suggests a clear focus on the interaction between customers and vendors, and less on technical issues. The developed customer-centric, value-based pricing framework helps to improve pricing techniques and strategies. Research limitations/implications – The research ...

Worldwide hedonic prices of subjective characteristics of hostels

An overnight at an accommodation establishment might be understood as a package of several different items. Since they are not traded separately in the market, their values for the consumer are difficult to measure. On the other hand, this information is be useful for managers to develop better strategies regarding the mix of services and facilities of their establishments. Analytical decomposition of total prices by different characteristics can be done through hedonic price techniques. In this paper, hedonic prices are used to analyze the impact of different characteristics on prices of hostels. Accommodation prices of more than 8000 hostels worldwide are explained by their characteristics as rated by guests. Results show that the most relevant characteristics are cleanliness, location and facilities.

The impact of highway proximity on distribution centres’ rents

Access to a highway is an important issue for distribution centres. In the Netherlands, distribution centres are located at only two kilometres from a highway, on average. This paper estimates the impact of highway proximity on distribution centres’ rents by using hedonic pricing techniques. We show that a one kilometre increase to the nearest highway decreases rents of an average sized distribution centre by about 11,000 euro per year. The distance to the geographic centre of the whole country is also shown to affect rents. For other types of industrial real estate, similar results are found. Based on our results, policymakers responsible for spatial planning or economic development may be able to make better decisions when developing new distribution centres.

Rewarding Risk-Taking or Managerial Skill? The Case of Private Equity Fund Managers

Compensation of private equity fund managers typically consists of a fixed management fee and a performance related carried interest which entitles managers to option-like payoffs. We consider whether this structure tends to reward excessive risk-taking rather than managerial skill. Our model of manager compensation is based on risk-neutral pricing techniques in an equilibrium framework where investors earn zero abnormal returns net-of-fees. When the model is calibrated to a set of buyout funds, our results demonstrate that managers indeed have an incentive for excessive risk-taking in case only fee income from the current finite lifetime fund is considered. In the more realistic setting where managers take into account potential compensation from follow-on funds, the risk-taking incentives will depend on the manager’s level of skill. Our model illustrates that the typical contractual arrangements can serve as a means of limiting possible risk-shifting behavior during fund lifetime. Also, skilled managers in this setting even have an incentive to reduce fund risk. Based on our sample of buyout funds we further show that the typical compensation structure is costly. Managers must generate substantial alpha in order to compensate investors for bearing the given fee components. Based on a standard compensation contract, annual break-even alphas amount to around 7 percent, and the present value of total compensation equals about 20 percent of committed capital.

One price for all? Price discrimination and market captivity: Evidence from the Italian city-pair markets

This paper tests whether, and to what extent, airlines exploit market captivity by using price discrimination strategies. The Italian passenger market is particularly fit for this purpose, given the high differentials in the degree of the inter-modal competition amongst domestic connections. Results show that, ceteris paribus, airlines adopt a different pricing behaviour depending on the degree of inter-modal market captivity. First, in highly concentrated markets with respect to air competitors, airlines price higher when the inter-modal competition is limited. This proves that inter-modal market captivity strengthens the effect of market power. Second, the inter-temporal price discrimination leads to a J-shaped distribution of fares over time, which is more pronounced when the inter-modal competition is effective. This suggests that airlines need to adopt a pricing technique that allows for a greater market segmentation in order to compete successfully with high-speed rail transport and to extract a larger part of passengers’ surplus. These results are relevant in terms of transport-investment implications and competition policy. The indirect benefits that investments in rail infrastructure would yield through downward pressures on competing airline fares should be embedded in any cost-benefit analysis of high-speed networks investments and in any policy evaluation of measures that aim to reduce the territorial gaps in infrastructure endowment and accessibility.

Temperature Control of a Commercial Building With Model Predictive Control Techniques

This paper addresses the problem of thermal energy control in shopping centers through the application of model predictive control (MPC) strategies. In particular, this paper uses an existing shopping center as pilot case, which is characterized by a large common multifloor space, which, in turn, gives rise to a significant vertical thermal stratification. This paper explores the importance of MPC parameters to energy efficiency and comfort levels. In addition, it addresses some notable extensions, from economic optimization, which paves the way to real-time pricing techniques, to integration with renewables, to robustness enforcement through Kalman filters, to hybrid control with switching signals mixed with continuous signals.

Practical Valuation of Options on Durable Goods

Option theory designed to value puts and calls on traded financial instruments has been profitably extended in many directions, one of which is to “real options.” Real options refer to choices that can become economically valuable in the future and whose existence can be valued in the present using (one hopes) more or less standard option pricing techniques. Most examples involve investment projects and similar choices at the firm level. In this article, Afik looks at some real options that are offered to individuals, that is, car buyers. A customer buys a new car from a dealer, who commits to buy it back as a used car in the future at a pre-specified price. The exercise price may vary according to how old the car is when the customer exercises the option. The option’s moneyness is a function of prices in the used-car market. A second related optional contract allows the customer to swap the old car for a new one of the same type at a fixed price difference. The swap contract (actually an option to exchange one asset for another) is influenced by prices for both used and new cars on the exercise date. The author presents valuation models and a simulation to illustrate valuation of these consumer real options.

A Review of Price Forecasting Problem and Techniques in Deregulated Electricity Markets

In deregulated electricity markets, price forecasting is gaining importance between various market players in the power in order to adjust their bids in the day-ahead electricity markets and maximize their profits. Electricity price is volatile but non random in nature making it possible to identify the patterns based on the historical data and forecast. An accurate price forecasting method is an important factor for the market players as it enables them to decide their bidding strategy to maximize profits. Various models have been developed over a period of time which can be broadly classified into two types of models that are mainly used for Electricity Price forecasting are: 1) Time series models; and 2) Simulation based models; time series models are widely used among the two, for day ahead forecasting. The presented work summarizes the influencing factors that affect the price behavior and various established forecasting models based on time series analysis, such as Linear regression based models, nonlinear heuristics based models and other simulation based models.

The valuation of forward-start rainbow options

This paper studies the valuation and hedging problems of forward-start rainbow options (FSROs). By combining the characteristics of both multiple assets and forward-start feature, this new type of derivative has many potential applications, for instance, to incorporate the reset provision in rainbow options for investors or hedgers or design more effective executive compensation plans. The main contribution of this paper is a novel martingale pricing technique for options whose payoffs are associated with multiple assets and time points. Equipped with this technique, the analytic pricing formula and the formulae of the delta and gamma of the FSRO are first derived. We conduct numerical experiments to verify these formulae and examine the characteristics of the FSRO’s price and Greek letters. To demonstrate the importance and general applicability of the proposed technique, we also apply it to deriving the pricing formula for the discrete-sampling lookback rainbow options.

The Markov-Switching Jump Diffusion Libor Market Model

In this paper, we introduce an extension to the LIBOR Market model that is suitable to incorporate both sudden market shocks as well as changes in the overall economic climate into the interest rate dynamics. This is achieved by substituting the simple diffusion process of the original LIBOR Market model by a regime-switching jump diffusion. We demonstrate that the new Markov-switching jump diffusion (MSJD) LIBOR Market model can be embedded into a generalized regime-switching Heath-Jarrow-Morton (HJM) model and prove that the considered market is arbitrage-free. We derive pricing formulas for caps, floors, and interest rate swaps using Fourier pricing techniques and show how the model can be calibrated to real data.

The Markov-switching jump diffusion LIBOR market model

In this paper, we introduce an extension to the LIBOR Market Model (LMM) that is suitable to incorporate both sudden market shocks as well as changes in the overall economic climate into the interest rate dynamics. This is achieved by substituting the simple diffusion process of the original LMM by a regime-switching jump diffusion. We demonstrate that the new Markov-switching jump diffusion (MSJD) LMM can be embedded into a generalized regime-switching Heath–Jarrow–Morton model and prove that the considered market is arbitrage-free. We derive pricing formulas for caps, floors and swaptions using Fourier pricing techniques and show how the model can be calibrated to real market data.

A hedonic price analysis for the Italian wine in the domestic market

Price formation in the domestic market has not been widely studied in spite of the importance of the Italian wine market in terms of sales. We use a unique dataset to estimate the hedonic price function for Italian wine sold on the Italian market in the period 2005–2011. For each bottle considered, the dataset records several characteristics such as the price by retail channel (on the mass market and in wine shops), label characteristics, chemical analysis, sensory evaluations and experts’ opinions. The objective of the analysis is to examine price setting on the mass market and in wine shops and to explore the differences in price formation for red and white wines. Our results have been obtained using an innovative technique that consists of combining hedonic price techniques with dimensionality reduction tools.

Counterparty credit risk pricing and measurement of swaption portfolios

An implementation of the radial basis function (RBF) method for solving Black-Scholes-type partial differential equations (PDEs) is proposed that takes advantage of the high degree of intercurve correlation present in term-structure models. The RBF-PDE technique is first used to price the swaptions in the absence of credit risk. As a by-product of this solution process, sets of RBF expansions for the value of each swaption at each time point are determined. These expansions, which can be evaluated in milliseconds, can then be incorporated into simulations for credit value adjustment and potential future exposure calculation. Several examples are shown that involve solving PDEs in as many as forty-eight spatial dimensions under both lognormal and local volatility.

Fair by design: Multidimensional envy-free mechanisms

We address the common scenario where a group of agents wants to divide a set of items fairly, and at the same time seeks to optimize a global goal. Suppose that each item is a task and we want to find an allocation that minimizes the completion time of the last task in an envy-free manner, where no agent prefers anyone else's allocated task bundle over its own. This optimization goal is called makespan minimization, and the agents are often treated as machines. We give tight deterministic bounds for: (1) two unrelated machines; and (2) m≥2 related machines.A natural question to ask is whether envy-free pricing techniques can improve the current known bounds for truthful mechanisms for the task-scheduling problem studied in the seminal paper of Nisan and Ronen (2001). We find that for two unrelated machines, envy-free in-expectation is a far weaker constraint (i.e. less restrictive) than truthful in-expectation.

On the use of the moment-matching technique for pricing and hedging multi-asset spread options

The aim of this paper is to show the benefit of applying a moment matching technique to the short leg component in order to price and hedge multi-asset spread options: in particular, we approximate the real dynamics of the short leg component by taking a log-normal proxy, whose equivalent volatility can be computed by performing a two-moment matching approximation. The pricing of the option is then performed once the equivalent correlation parameter between the long leg underlying and the proxy short leg component has been calculated. The main advantage associated with the moment matching approach proposed in this paper is a reduction of the dimension of the pricing problem: we can, indeed, continue using all the option formulas available in the literature for two-legged spread options, i.e. spread options written on two underlyings. Besides it, the combined use of an option formula for two-legged spread options and the moment matching technique applied to the short leg component provides a good approximation to the Monte Carlo simulation. It is well-known that the Monte Carlo price and Greeks can be considered as the benchmark since no exact formula is available for the pricing and hedging of multi-asset spread options. The accuracy of our approach is even comparable to the one provided by using closed form approximation formulas based on three underlyings, where each underlying entering into the short leg component is treated separately.

Computer-Assisted Interactive Learning for Teaching Transmission Pricing Methodologies

This paper presents a computer-assisted method to teach and understand transmission pricing techniques. The education method is facilitated by specially designed user-friendly transmission pricing software (TPS). The proposed approach helps students fully understand transmission pricing through the fulfillment of the following educational objectives: 1) use of TPS to solve the transmission pricing problem of a small power system as well as a real-world power system; 2) complete understanding of the mathematics involved and development of software code to reproduce part of the results of TPS; 3) analysis of the results, identification and justification of the differences among three transmission tracing techniques and eight transmission cost allocation methods; and 4) extension of TPS methodologies. These methods have been proven effective in the education of students studying power system economics at the National Technical University of Athens (NTUA), Greece. A full-fledged, robust, comprehensive study of the educational improvements achieved through the use of TPS is provided.

GROW-OUT OF ABALONE Haliotis squamata IN FLOATING CAGES FED DIFFERENT PROPORTIONS OF SEAWEED AND WITH REDUCTION OF STOCKING DENSITY

Abalone is a herbivore marine animal which feeds on seaweed. Abalone culture has a good prospect in terms of price, market share and simple culture technique. Thus, a study was conducted with the aim of finding out an effective and efficient abalone culture technique in terms of feed use and density. In this study, a 42 cm diameter plastic container with a 22 cm height was used. Three vertically arranged containers were used as the experimental group which were put into a net box and hung onto a raft so that the containers were placed in a 4 m depth below the sea surface. The juvenile of abalones being used came from a hatchery production that has been adapted to cages environment with Gracilaria sp. and Ulva sp. feed. The initial density of abalones was 450 for each container, with the initial weight of 2.6-3.2 g and the 2.5-2.7 cm shell lengths. The abalones were fed with Gracilaria sp. and Ulva sp. seaweeds with different Gracilaria sp./Ulva sp. proportions, i.e. 100/0% (A); 80/20% (B); and 60/40% (C) as the treatments. Each treatment consisted of two replications. After three months of rearing period, densities of abalones were reduced to be 190 for each experimental unit. Weight and shell length of abalones were measured every month by measuring 25 abalone samples from each experimental unit. The result of the experiment showed that the increase in the Ulva sp. proportion in the feed increased the growth of abalones and decreased the feed conversion. Feeding with Gracilaria sp./Ulva sp. proportion of 60%/40% allowed the best growth of abalones. The decrease of abalone density in the experimental unit after three months of rearing also produced an increase in their growth.

A strategy for FTR bidding in deregulated electricity markets

This paper presents a strategy to evaluate the financial transmission rights (FTRs) bids of the electricity market participants using locational marginal price (LMP) technique and serve as an important instrument for hedging the risk of congestion charges. In deregulated electricity markets, FTRs are allocated through the process of auction to reduce the losses in congestion management by making bids for different transmission lines. The main objective of an auction is to maximize revenues from FTRs. A generalized mathematical model of FTR auction for maximising revenues and availability to all entrepreneurs on non-discriminatory basis to keep the system within limits is developed. The FTRs and LMP of 14 bus system are calculated in this paper using the software program developed in MATLAB determines the congestion credits. FTR congestion credits are calculated based on average locational marginal price. Introducing a hybrid scheme for congestion management and FTRs, facilitates the new restructured power system to deal with congestion charges and credits and helps in presenting a new approach for transmission pricing. A numerical example of 14 bus system has been illustrated for analysing the results and supports the approach.

Pricing-Based Multiresource Allocation in OFDMA Cognitive Radio Networks: An Energy Efficiency Perspective

Both the orthogonal frequency-division multiple access (OFDMA) and cognitive radio (CR) technologies offer great flexibility and feasibility for future green wireless communications. In this paper, an energy-efficient multiresource-allocation scheme is proposed for OFDMA CR networks (CRNs) with multiple secondary transmitters (STs). To maximize the energy efficiency (EE) and guarantee the primary transmitter's (PT's) quality-of-service (QoS) requirement, a linear pricing technique is employed to handle both the inter-ST coupling (the spectrum competition among STs) and intra-ST coupling (the correlation between the available transmit power and assigned subchannels for each ST). Furthermore, a distributed algorithm is devised to harvest the multiresource and multiuser gains, and the multiresource allocation is transformed to 1-D pricing-factor profile searching. Simulation results demonstrate that the proposed strategy brings higher EE. Additionally, by adjusting the pricing factors, a different performance can be achieved by the STs with different priorities.

Pricing and Hedging Multi-Asset Spread Options by a Three-Dimensional Fourier Cosine Series Expansion Method

The aim of this paper is to show the bene fit of applying a three-dimensional Fourier cosine series expansion method in order to price and hedge multi-asset spread options. The approach consists of approximating the probability density function by its Fourier cosine series expansion in a truncated domain. The Fourier coefficients associated with the payoff function are then approximated via the so-called discrete cosine transform. The main advantage associated with the numerical approach proposed in this paper is the level of accuracy reached with respect to the Monte Carlo simulation, not only for the option price but especially for the most important Greeks, namely deltas and gammas. This is not the case for the other approaches available in the literature. Our numerical examples show that the three-dimensional cosine series method can be seen as an alternative pricing technique, which can deal with multi-asset option problems of medium-sized dimensionality. The main contribution of our work is a concrete application of the Fourier cosine series expansion method to option problems whose dimension is higher than two.