This paper analyzes the efficiency of three simple cost-based pricing heuristics in a twoperiod capacity planning model with uncertain demand. All policies start with full cost introductory prices but differ in second-period pricing. Under “adaptive full-cost pricing”, the firm updates second-period prices on the basis of current demand conditions and full unit costs. Under “wait-and-see pricing”, the firm sets second-period prices on the basis of updated demand information and current opportunity cost of capacity. Under “myopic fullcost pricing”, prices remain constant for both periods. Although we identify one special case for which all three heuristics replicate the optimal solution, we find that “wait-and-see pricing” dominates “adaptive full-cost pricing”, which dominates its ‘myopic’ counterpart. However, we also discuss factors that may justify the use of ‘full-cost pricing’ in real-world planning environments. We note that if the firm faces significant information and/or communication costs, or if price changes will probably only occur in the far future, even the simple “myopic full-cost pricing” heuristic may be a reasonable policy.
This paper analyzes the choice among alternative fixed and variable cost structures under demand uncertainty. We show that the standard decision rules for the choice among cost structures under certainty continue to hold if the decision maker is risk neutral. If the decision maker is risk averse, the optimal cost structure depends on the decision model. With cost-based decision making, the break even quantities are lower than under certainty. If the decision is based on contribution margins, the opposite holds. That is, a cost structure with higher fixed and lower variable cost becomes attractive for a lower (higher) quantity than under certainty if the decision maker is risk averse and makes his decision on the basis of cost (contribution margin). We also show that cost structures that are dominated under certainty can become attractive for a risk averse decision maker. Finally, we provide a simple agency model and show that the choice among different cost structures can not be separated from the optimal solution of the agency problem even if the principal is risk neutral. More generally, our results suggest that a simple comparison of cost functions is usually not sufficient for an optimal choice between cost structures under uncertainty.
We study the optimal accounting policy of a financially constrained firm that pledges assets to raise debt capital for financing a risky project. The accounting system provides information about the value of the collateral. Absent accounting regulation, the optimal accounting system is conditionally conservative: it recognizes an impairment loss if the asset value is below a certain threshold, but never reports unrealized gains. We describe the optimal impairment rule and the optimal precision of the accounting information, and we provide comparative static results that lead to testable predictions on the determinants of impairment rules.
This paper analyzes the impact of capacity costs on bidding strategies of firms participating in procurement auctions. More efficient firms will invest in advance due to their high probability of winning the auction while less efficient bidders prefer to wait with their investments until the outcome of the auction is known. However, in equilibrium both types of firms include a coverage for their investment costs in their bids and therefore adopt a full cost pricing policy.
