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

Kenneth Fjell () and John Heywood
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Kenneth Fjell: NHH Norwegian School of Economics

Journal of Revenue and Pricing Management, 2024, vol. 23, issue 2, No 4, 103-111

Abstract: 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.

Keywords: Pricing; Inverse; Elasticity; Marginal cost; Related products (search for similar items in EconPapers)
JEL-codes: C65 D42 M21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41272-023-00436-8

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