Pricing Methods

Topics: Pricing, Price, Suggested retail price Pages: 20 (5754 words) Published: July 27, 2008
Helsinki, Finland
Producer price index for services
Pricing methods by
Aurél Kenessey (CBS, Netherlands)
Benoît Buisson (INSEE, France)
Richard McKenzie (OECD)
1. Introduction
The term ‘pricing method’ in the context of compiling price indices would probably be regarded by most price statisticians as a common concept. However when one attempts to find a definition for this concept, or indeed a definition for various types of ‘pricing methods’, the inadequacy of the current literature becomes apparent. This is particularly true in the case of producer price indices for service industries (SPPI), where defining pricing methods is crucial in many respects. This paper aims to review references to ‘pricing methods’ in the current literature in respect to SPPI, and to develop a list of criteria which may help to distinguish between different pricing methods used in SPPI and how they relate to the ideal goal of pricing to constant quality. 1.1 What are pricing methods?

This paper is about pricing methods, for which the following definition is proposed: ‘the use of a specific type of information on prices to represent the evolution of price in price index compilation. The specific type of information specifies the method.’ As this sounds quite abstract an example is informative: the unit value method is the use of income divided by quantities sold as price information in price index calculation. The ideal pricing method is transaction pricing, which is the use of actually paid prices of individual transactions that are repeated in every survey period. Price index theory is built on the assumption that this ideal pricing method is used or sufficiently approximated. However pricing methods in practice, and especially in that of SPPI, stray from this ideal. The closer a pricing method is to transaction pricing the better. Therefore, a pricing method can be rated according to how it compares to transaction pricing. Before we discuss pricing methods at more length, it is important to distinguish them from pricing mechanisms. The definition of pricing mechanism is the way in which a price comes about between economic actors. An important difference with pricing method is that a pricing mechanism is in place between economic actors, while a pricing method is employed by statisticians. A pricing mechanism is a limiting condition for the statistician in his options for choosing a pricing method. Pricing methods are therefore ‘downstream’ from pricing mechanisms. Pricing mechanisms are in turn ‘downstream’ from the nature of the product. See table 1 for examples of these three concepts. The appendix offers more discussion on of the nature of the service and the pricing mechanism. A pricing method is solely concerned with what type of data is used to measure / estimate the evolution of prices. It does not pertain to subsequent treatment like (elementary) index compilation and aggregation and other issues in PPI development like sampling or questionnaire design. These issues do not convey difficulties that are specific for services, so they do not deviate from standard practice of manufacturing PPI’s. Pricing method is also not concerned with preceding phases in SPPI development when the goal regarding coverage of the SPPI is decided, like in- or exclusion of subcontracting, taxes, subsidies, import, and export.

Table 1: Examples of the service nature, pricing mechanism and pricing method relationship Nature of the service* Pricing mechanism Pricing method
Car rental Standard Commercial list price, with an
occasional discount
Sample of some of the list
Construction Some product details
determinable only during
The exact final price is known
only long after product
Prices of a fixed set of inputs
(including profit) are
Service is strictly tied to
an asset.
Percentage fee of the value of
the asset that the service...
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