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Adjusted repeated myopic use of the inverse elasticity pricing rule

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  • 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
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    References listed on IDEAS

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    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.
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