Activity-Based Pricing in a Monopoly
- Topics:
- Strategic Management Tools
- Tags:
- Activity Based Costing,
- Pricing Strategy,
- Pricing,
- Marketing Research,
- Marketing,
- Managerial Accounting,
- It Services,
- Harvard Knowledgebase,
- Finance,
- Support Services
- Source:
- Harvard Knowledgebase
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Overview: This paper studies the interaction between cost accounting systems and pricing decisions in a setting where a monopolist sells a base product and related support services to customers whose preference for support services is known only to them. The paper considers two pricing mechanisms–Activity-Based Pricing (ABP) and traditional pricing, and two cost-accounting systems–Activity-Based Costing (ABC) and traditional costing. The paper also compares the equilibrium quantities of the base product and support services sold, the information rent paid to the customers, and the expected profits of the monopolist under all four combinations of cost-driver volume and cost-driver rate information. It shows that ABP helps reduce control problems, such as moral hazard and adverse selection problems, for the supplier and increases its ability to engage in price discrimination. The paper also shows that cost-driver rate information and cost-driver volume information are complements. While prior literature has viewed ABC and Activity-Based Management (ABM) as facilitating better decision-making, this paper shows that ABC and ABP (a form of ABM) are useful tools for addressing control problems in supply chains.
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Format: PDF | Size: 322KB | Date: Feb 2002 | Pages: 38
