Fair Price, Optimal Price
Katrina Lamb | October 27th, 2009Filed under: Managers View | Tags: actively managing the price lever, Adam Smith, Adam Smith's classsical economics, aristotle, B2C, blaise pascal, decision making under uncertainty, demand management, dining out, fair price economics, fair pricing, manage uncertainty toward a more profitable outcome, micromarketing, paul krugman, pierre de fermat, price optimization, pricing under uncertainty, product mix for fairprice, revenue optimization, risk and return, thomas aquinas, uncertainty, What is a fair price? | No Comments »
Businesses seek to maximize the value they can obtain from their revenue models. Price is the key lever decision-makers can operate to influence revenue, and in recent years a growing number of businesses have sought to implement strategies for actively managing the price lever – strategies such as demand management and revenue optimization. However businesses are also highly sensitive to the perception by individual consumers and the society at large that their prices are fair, in other words that they do not violate widely held individual or societal norms. Fair pricing matters – it matters to me, and to you, and perhaps ever more so in a climate characterized by economic uncertainty, downward pressure on demand and a perceptible decrease in the citizenry’s trust of public and private institutions.
Fortunately for business decision-makers, fair pricing and optimal pricing are not at odds with each other but can comfortably coexist. Over the course of the coming weeks my colleagues at Sentrana and I will be approaching the rich topic of fair pricing in a series of exchanges on this blog.
debating the age-old question of fair price
What is a fair price? This question has perplexed humanity throughout history. Leading thought output of the ages, from Aristotle’s Nicomachean Ethics to the Summa Theologicae of Thomas Aquinas, Pierre de Fermat’s probability proofs and Adam Smith’s classsical economics, have all weighed in with considered opinions on the fairness and justness of alternative ways to price economic goods and services, and the debate continues today. A series of letters exchanged between Blaise Pascal and Pierre de Fermat in 1654 is often regarded as a primal cause of the development of modern probability theory: this exchange was actually an attempt to establish a scientific basis for the notion of fair price. In his paper “The Unity and Diversity of Probability” Rutgers professor Glenn Shafer shows how these letters created hypothetical games of value that we today can recognize as the application of probability methods to defend a price as ‘fair’ under conditions of uncertainty. Read the rest of this entry »
managers must make. This is indeed a compelling sentiment, and has stirred much discussion amongst my colleagues in industry and in academia (our research organization collaborates closely with professors within the University of Chicago and Carnegie Mellon University). This discussion has taken on many twists and turns, which we hope to summarize in future posts. But, there is one particular question that has resonated throughout our discussions: