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On repeated myopic use of the inverse elasticity pricing rule

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  • Fjell, Kenneth
  • Pal, Debashis

Abstract

We examine the effects of repeated myopic use of the inverse elasticity pricing rule. By myopic, we mean ignoring that elasticity and marginal cost may vary with output and price. It is known that myopic use of the rule leads to price changes which are too large relative to the optimal price change (Fjell, 2003). While some microeconomics textbooks suggest that the rule may be used repeatedly to reach optimal price, they are vague about the conditions for when this works. We show that repeated myopic use leads to convergence if demand is sufficiently convex, and specify an exact condition.

Suggested Citation

  • Fjell, Kenneth & Pal, Debashis, 2019. "On repeated myopic use of the inverse elasticity pricing rule," Economics Letters, Elsevier, vol. 175(C), pages 12-14.
    • Handle: RePEc:eee:ecolet:v:175:y:2019:i:c:p:12-14
    DOI: 10.1016/j.econlet.2018.11.028
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    References listed on IDEAS

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    1. Erkki K. Laitinen, 2009. "From complexities to the rules of thumb: towards optimisation in pricing decisions," International Journal of Applied Management Science, Inderscience Enterprises Ltd, vol. 1(4), pages 340-366.
    2. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    3. K. Fjell, 2003. "Elasticity based pricing rules: a cautionary note," Applied Economics Letters, Taylor & Francis Journals, vol. 10(12), pages 787-791.
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    Cited by:

    1. Kenneth Fjell & John S. Heywood, 2024. "Myopic use of the inverse elasticity pricing rule by a multiproduct firm," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 23(2), pages 103-111, April.
    2. Kenneth Fjell & Debashis Pal, 2021. "Adjusted repeated myopic use of the inverse elasticity pricing rule," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 20(5), pages 559-565, October.

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    More about this item

    Keywords

    Microeconomics; Markup pricing; Elasticity;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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