Impact of cost uncertainty on pricing decisions under risk aversion
| Autor: | Sechan Oh, James J. Rhodes, Ray Strong |
|---|---|
| Rok vydání: | 2016 |
| Předmět: |
Average cost pricing
021103 operations research Information Systems and Management General Computer Science Cost estimate Total cost 05 social sciences 0211 other engineering and technologies 02 engineering and technology Management Science and Operations Research Cost contingency Industrial and Manufacturing Engineering Implicit cost Microeconomics Modeling and Simulation 0502 economics and business Relevant cost Economics 050203 business & management Expected utility hypothesis Target costing |
| Zdroj: | European Journal of Operational Research. 253:144-153 |
| ISSN: | 0377-2217 |
| Popis: | This paper studies cost uncertainty in services. Despite the fact that the service sector has become the largest component of gross domestic products in most developed economies, cost uncertainty and its impact on pricing decisions have not received much attention in the literature. In this paper, we first identify the root causes of cost uncertainty in services. Using the distinctive characteristics of services defined in the literature, we show why cost uncertainty, which has been widely neglected in the manufacturing dominated literature, is pervasive in services. Next, we investigate how cost uncertainty affects a risk-averse service provider’s pricing decisions in a make-to-order setting. Using the expected utility theory framework, we show that cost uncertainty increases the optimal price, whereas demand uncertainty reduces it. As a result of the countervailing impacts, the optimal price under risk aversion may be larger or smaller than the optimal risk-neutral price. Next, we study the problem of optimizing cost contingency in service contract pricing. We show that the optimal cost contingency decreases as the profit of the contract increases even when the utility function exhibits an increasing absolute risk aversion. Finally, we introduce various strategies to mitigate the risk of cost uncertainty observed in practice, and propose new research problems. |
| Databáze: | OpenAIRE |
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