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The optimality of full-cost pricing: a simulation analysis of the price-adjustment dynamics

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  • Graziano Coller
  • Paolo Collini

Abstract

Full-cost pricing is a widespread practice despite its lack of theoretical support as a profit-maximizing procedure. Previous research on the optimality of full-cost pricing (i.e., its ability to provide profit-maximizing prices) has produced contrasting results. In this paper we discuss the optimality of full-cost pricing through a numerical experiment controlling two factors that may explain some of the inconsistencies in previous studies: the dynamics of the pricing mechanisms and the level of demand variability. We show that, while with static demand full-cost pricing entails virtually no economic loss, the introduction of demand variability means that economic loss increases with variability. The worsening effect on performances of a trend in demand is also discussed. Finally, tactical and list pricing are compared in their ability to cope with frequent demand changes; the results show that the ability of full-cost pricing in driving pricing toward optimal decision is not confirmed when the issue of continuous adjustments to demand is considered. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jmgtco:v:26:y:2015:i:2:p:157-191
    DOI: 10.1007/s00187-015-0212-3
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    References listed on IDEAS

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    Cited by:

    1. Graziano Coller, 2018. "L?eterno divario tra teoria e prassi del pricing nel Management Accounting," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2018(2), pages 11-33.

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    Keywords

    Simulations; Full-cost; Pricing;
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