Average cost pricing

Abstract: The following sections are included:The State of the DebateIsolation of the ProblemWhat is Optimum Pricing?The Argument for Multi-Part PricingMulti-Part Pricing Compared with the Hotelling–Lerner SolutionAverage Cost Pricing Compared with the Hotelling–Lerner SolutionThe Problems that Remain

Abstract: The Baumol-Willig efficient component pricing rule states that it is efficient to set the price of access to an essential facility equal to the direct cost of access plus the opportunity cost to the integrated access provider. The authors analyze the relevant notion of 'opportunity cost' under various assumptions about demand and supply conditions, including product differentiation, bypass, and substitution possibilities, which all reduce opportunity cost compared to the benchmark case. They show that the Ramsey approach to access pricing developed by J.-J. Laffont and J. Tirole (1994) is closely related to the efficient component pricing rule provided opportunity cost is correctly interpreted.

Abstract: The equitable division of a joint cost (or a jointly produced output) among agents with different shares or types of output (or input) commodities, is a central theme of the theory of cooperative games with transferable utility. Ever since Shapley's seminal contribution in 1953, this question has generated some of the deepest axiomatic results of modern microeconomic theory. More recently, the simpler problem of rationing a single commodity according to a profile of claims (reflecting individual needs, or demands, or liabilities) has been another fertile ground for axiomatic analysis. This rationing model is often called the bankruptcy problem in the literature. This chapter reviews the normative literature on these two models, and emphasizes their deep structural link via the Additivity axiom for cost sharing: individual cost shares depend additively upon the cost function. Loosely speaking, an additive cost-sharing method can be written as the integral of a rationing method, and this representation defines a linear isomorphism between additive cost-sharing methods and rationing methods. The simple proportionality rule in rationing thus corresponds to average cost pricing and to the Aumann-Shapley pricing method (respectively for homogeneous or heterogeneous output commodities). The uniform rationing rule, equalizing individual shares subject to the claim being an upper bound, corresponds to serial cost sharing. And random priority rationing corresponds to the Shapley-Shubik method, applying the Shapley formula to the Stand Alone costs. Several open problems are included. The axiomatic discussion of non-additive methods to share joint costs appears to be a promising direction for future research.

Abstract: The pricing of products and services sold over the Internet channel is becoming more dynamic. In part this is due to the increasing use of auction models in business and consumer markets to sell commodities, excess inventories, used merchandise, rare items collectibles, and other items. Marketers are resorting to dynamic prices even for goods and services sold at posted prices, spurred partly by the lower menu cost of changing prices on the Internet and partly as a response to consumer use of price-comparison bots. This paper explains the relevance of dynamic pricing in the digital economy by comparing the physical value chain with the virtual-information-based value chain. It explores the implications of certain aspects of dynamic pricing in consumer markets (e.g., dynamic pricing of posted prices, reverse auction pricing of goods and services as used by Priceline) from the perspective of consumer price expectations, the role of information and consumer learning, and their impact on consumer responses to prices across different product categories. Several propositions are developed, and issues for research are identified.