The optimality of full-cost pricing: a simulation analysis of the price-adjustment dynamics

Full-cost pricing is a widespread practice despite its lack of theoretical support as a profit-maximizing procedure. Previous research on the optimality of full-cost pricing (i.e., its ability to provide profit-maximizing prices) has produced contrasting results. In this paper we discuss the optimality of full-cost pricing through a numerical experiment controlling two factors that may explain some of the inconsistencies in previous studies: the dynamics of the pricing mechanisms and the level of demand variability. We show that, while with static demand full-cost pricing entails virtually no economic loss, the introduction of demand variability means that economic loss increases with variability. The worsening effect on performances of a trend in demand is also discussed. Finally, tactical and list pricing are compared in their ability to cope with frequent demand changes; the results show that the ability of full-cost pricing in driving pricing toward optimal decision is not confirmed when the issue of continuous adjustments to demand is considered. © 2015, Springer-Verlag Berlin Heidelberg.