The Impact of Cost Based Pricing Rules on Capacity Planning Under Uncertainty

This paper analyzes the efficiency of three simple cost based pricing heuristics in a two-period capacity planning model with uncertain demand. All policies start with full cost introductory prices but differ with respect to second period pricing. Under quot;adaptive full cost pricingquot; the firm updates second period prices on the basis of current demand conditions and full unit costs, whereas under quot;wait and see pricingquot; second period prices are set on the basis of updated demand information and current opportunity cost of capacity. Finally, under quot;myopic full cost pricingquot; prices remain constant for both periods. Although we identify one special case for which all three heuristics exactly replicate the optimal solution, we find that quot;wait and see pricingquot; dominates quot;adaptive full cost pricingquot;, while the quot;adaptivequot; version of full cost pricing dominates its quot;myopicquot; counterpart. However, we also discuss some factors that may justify the use of quot;full cost pricingquot; in real world planning environments. In particular, if the firm faces significant information and/or communication costs, or if price changes are only likely to occur in the far future, even the simple quot;myopic full cost pricingquot; heuristic may be a reasonable policy