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Construction price formation: full-cost pricing or neoclassical microeconomic theory?

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  • Martin Skitmore
  • Goran Runeson
  • Xinling Chang

Abstract

Neo-classical microeconomic theory has been suggested to offer (1) an appropriate analytical tool for construction price determination while, at the same time, (2) full-cost pricing is most commonly accepted pricing policy of construction firms. Paradoxically, however, both are mutually exclusive theories. Only one, if any, can be correct. This paper examines both (1) and (2) by analysis of the evidence available in literature and concludes in favour of (1). It is only in disequilibrium, however, that the differences in behaviour can be clearly observed. In equilibrium, the difference between the two theories from a practical point of view is not very substantial. In addition, the endemic nature of uncertainty in the industry in general makes the task of estimating costs and prices difficult in practice. Therefore, although neoclassical microeconomic theory provides a useful means of analysis, it offers little for the practice of pricing, which is much more closely related to the marketing discipline than economics.

Suggested Citation

  • Martin Skitmore & Goran Runeson & Xinling Chang, 2006. "Construction price formation: full-cost pricing or neoclassical microeconomic theory?," Construction Management and Economics, Taylor & Francis Journals, vol. 24(7), pages 773-783.
    • Handle: RePEc:taf:conmgt:v:24:y:2006:i:7:p:773-783
    DOI: 10.1080/01446190500434849
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    References listed on IDEAS

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    1. Michael H. Rothkopf, 1980. "On Multiplicative Bidding Strategies," Operations Research, INFORMS, vol. 28(3-part-i), pages 570-575, June.
    2. Hoffman, K. Douglas & Turley, L. W. & Kelley, Scott W., 2002. "Pricing retail services," Journal of Business Research, Elsevier, vol. 55(12), pages 1015-1023, December.
    3. Goran Runeson & Martin Skitmore, 1999. "Tendering theory revisited," Construction Management and Economics, Taylor & Francis Journals, vol. 17(3), pages 285-296.
    4. Graham Winch, 2001. "Governing the project process: a conceptual framework," Construction Management and Economics, Taylor & Francis Journals, vol. 19(8), pages 799-808.
    5. Lawrence Friedman, 1956. "A Competitive-Bidding Strategy," Operations Research, INFORMS, vol. 4(1), pages 104-112, February.
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    Cited by:

    1. Ma, Le & Liu, Henry J. & Edwards, David J. & Sing, Michael C.P., 2021. "Housing price dynamics on residential construction: A case study of the Australian property sector," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 525-532.
    2. Daisy Yeung & Martin Skitmore, 2012. "A method for systematically pooling data in very early stage construction price forecasting," Construction Management and Economics, Taylor & Francis Journals, vol. 30(11), pages 929-939, November.

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