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Myopic use of the inverse elasticity pricing rule by a multiproduct firm

Author

Listed:
  • Kenneth Fjell

    (NHH Norwegian School of Economics)

  • John S. Heywood

    (University of WI – Milwaukee)

Abstract

We examine the myopic price changes based on the inverse elasticity pricing rule for a multiproduct firm. By myopic, we mean ignoring that elasticity likely changes with price and that marginal cost likely changes with quantity. Unlike with a single product firm, constant demand elasticities and marginal cost do not cause the inverse elasticity rule to yield the profit-maximizing price change. The price change will be too large if the related products are complements which are relatively inelastic and too small otherwise. Importantly, whether non-constant marginal cost causes too large or too small, a price change is independent of whether the related products are substitutes or complements. Increasing marginal costs always causes too large an increase and decreasing marginal costs always causes too small an increase. While not providing a full characterization, we partially identify the net effects of allowing elasticities, cross-price elasticities, and marginal cost to be non-constant.

Suggested Citation

  • Kenneth Fjell & John S. Heywood, 2024. "Myopic use of the inverse elasticity pricing rule by a multiproduct firm," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 23(2), pages 103-111, April.
    • Handle: RePEc:pal:jorapm:v:23:y:2024:i:2:d:10.1057_s41272-023-00436-8
    DOI: 10.1057/s41272-023-00436-8
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    References listed on IDEAS

    as
    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. Johannes Auer & Dominik Papies, 2020. "Cross-price elasticities and their determinants: a meta-analysis and new empirical generalizations," Journal of the Academy of Marketing Science, Springer, vol. 48(3), pages 584-605, May.
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    7. 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.
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    More about this item

    Keywords

    Pricing; Inverse; Elasticity; Marginal cost; Related products;
    All these keywords.

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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