erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Innovative Pricing

Andreas Jonason (Royal Institute of Technology, Sweden)

Abstract

Textbook pricing theory is a standard application of supply and demand analysis of well defined products under a situation of full or almost full information. It has always had difficulties dealing with innovation and introduction of new products. The increasingly intangible nature of products leaves firms confronted with the strategic decision of determining what to charge for. They are reaching for new methods of pricing to capture the full value of their products, thus introducing pricing and financing schemes not thought of previously. The introduction of heterogeneous price levels and the bundling of more or less well defined goods and services in combination with the unpredictability of other agents in the market have made standard equilibrium theory with its restricted opportunity sets less useful as a theoretical foundation for optimal pricing. Hence, placing the pricing model in a wider opportunity environment, firms’ theoretical pricing and bundling decisions will deviate from what has been previously been considered rational.

Innovative pricing (IP), is introduced as apart of the product development process. It defines the product such that a base for efficient pricing can be defined, i.e. a base that makes it possible for the firm to capture a maximum value in the market. IP, hence, becomes an act of innovation. I formulate a model in which each firm sets its prices under these experimental and unpredictable conditions. The Innovative Pricing solutions that are realized in the model become part of the product innovation and, hence, have to be seen as a part of the innovation process.

Economic Research Center
Middle East Technical University
06531 Ankara Turkey
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e-mail: metuerc@metu.edu.tr