IDEAS home Printed from https://ideas.repec.org/a/pal/jorapm/v20y2021i5d10.1057_s41272-020-00272-0.html
   My bibliography  Save this article

Adjusted repeated myopic use of the inverse elasticity pricing rule

Author

Listed:
  • Kenneth Fjell

    (NHH Norwegian School of Economics)

  • Debashis Pal

    (University of Cincinnati)

Abstract

It has been shown that repeated myopic use of inverse elasticity pricing rule converges on the profit maximizing price only if demand is sufficiently convex, and that it will never converge for linear or strictly concave demands (Fjell and Pal 2019). By myopic, we mean ignoring that elasticity and marginal cost may vary with output and price. We explore a price adjustment process, where at each stage the new price is a convex combination of the current price and the myopic price that is dictated by the inverse elasticity pricing rule. We show that as long as sufficient weight is placed on the current price, the price sequence converges on the profit maximizing price for all demands. The precise range of potential convex combinations for convergence are determined; both for the traditional (multiplicative) version of the inverse elasticity pricing rule, as well as for the unfamiliar additive version. A comparison of the two shows that the latter appears superior in the sense that it converges for a larger range of convex combinations, and that it seems simpler and more intuitive in its expression.

Suggested Citation

  • 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.
    • Handle: RePEc:pal:jorapm:v:20:y:2021:i:5:d:10.1057_s41272-020-00272-0
    DOI: 10.1057/s41272-020-00272-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41272-020-00272-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41272-020-00272-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fjell, Kenneth & Pal, Debashis, 2019. "On repeated myopic use of the inverse elasticity pricing rule," Economics Letters, Elsevier, vol. 175(C), pages 12-14.
    2. 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.
    3. Krueger Malte, 2009. "The Elasticity Pricing Rule for Two-sided Markets: A Note," Review of Network Economics, De Gruyter, vol. 8(3), pages 1-8, September.
    4. Saari, Donald G, 1985. "Iterative Price Mechanisms," Econometrica, Econometric Society, vol. 53(5), pages 1117-1131, September.
    5. K. Fjell, 2003. "Elasticity based pricing rules: a cautionary note," Applied Economics Letters, Taylor & Francis Journals, vol. 10(12), pages 787-791.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. Fjell, Kenneth & Pal, Debashis, 2019. "On repeated myopic use of the inverse elasticity pricing rule," Economics Letters, Elsevier, vol. 175(C), pages 12-14.
    3. van der Laan, G. & Talman, A.J.J., 2002. "Dynamic Adjustment of Supply Constrained Disequilibria to Walrasian Equilibrium," Other publications TiSEM 8c5d443d-92c8-4e82-bcef-3, Tilburg University, School of Economics and Management.
    4. Hommes, Cars & Huang, Hai & Wang, Duo, 2005. "A robust rational route to randomness in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1043-1072, June.
    5. Herings, Jean-Jacques & van der Laan, Gerard & Talman, Dolf & Venniker, Richard, 1997. "Equilibrium adjustment of disequilibrium prices," Journal of Mathematical Economics, Elsevier, vol. 27(1), pages 53-77, February.
    6. Sjur Didrik Flåm, 2013. "Reaching Market Equilibrium Merely by Bilateral Barters," CESifo Working Paper Series 4504, CESifo.
    7. Creti, Anna & Verdier, Marianne, 2014. "Fraud, investments and liability regimes in payment platforms," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 84-93.
    8. Goeree, Jacob K. & Hommes, Cars & Weddepohl, Claus, 1998. "Stability and complex dynamics in a discrete tatonnement model," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 395-410, January.
    9. Herbert Gintis & Antoine Mandel, 2012. "The Stability of Walrasian General Equilibrium," Documents de travail du Centre d'Economie de la Sorbonne 12065r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Apr 2013.
    10. Tamotsu Onozaki, 2018. "Nonlinearity, Bounded Rationality, and Heterogeneity," Springer Books, Springer, number 978-4-431-54971-0, July.
    11. Andras Niedermayer & Artyom Shneyerov, 2014. "For‐Profit Search Platforms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(3), pages 765-789, August.
    12. Laitinen, Erkki K., 2014. "Influence of cost accounting change on performance of manufacturing firms," Advances in accounting, Elsevier, vol. 30(1), pages 230-240.
    13. Graziano Coller & Paolo Collini, 2015. "The optimality of full-cost pricing: a simulation analysis of the price-adjustment dynamics," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(2), pages 157-191, August.
    14. Ahmad K. Naimzada & Serena Sordi, 2018. "On controlling chaos in a discrete†time Walrasian tâtonnement process," Metroeconomica, Wiley Blackwell, vol. 69(1), pages 178-194, February.
    15. Edoardo Gaffeo & Mauro Gallegati & Umberto Gostoli, 2015. "An agent-based “proof of principle” for Walrasian macroeconomic theory," Computational and Mathematical Organization Theory, Springer, vol. 21(2), pages 150-183, June.
    16. Cavalli, Fausto & Naimzada, Ahmad, 2015. "A tâtonnement process with fading memory, stabilization and optimal speed of convergence," Chaos, Solitons & Fractals, Elsevier, vol. 79(C), pages 116-129.
    17. Herrmann, John D. & Kahn, Peter J., 1999. "A continuity property for local price adjustment mechanisms," Journal of Mathematical Economics, Elsevier, vol. 31(4), pages 419-453, May.
    18. Dennis Weisman & Soheil Nadimi, 2019. "A note on price regulation in two-sided markets," Economics Bulletin, AccessEcon, vol. 39(4), pages 2766-2777.
    19. Ingrid Kubin & Laura Gardini, 2013. "Border collision bifurcations in boom and bust cycles," Journal of Evolutionary Economics, Springer, vol. 23(4), pages 811-829, September.
    20. Eric Kemp-Benedict, 2011. "Second-Order, Dissipative T\^atonnement: Economic Interpretation and 2-Point Limit Cycles," Papers 1108.0188, arXiv.org, revised Aug 2011.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:jorapm:v:20:y:2021:i:5:d:10.1057_s41272-020-00272-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.