Optimal imperfect pricing decision-making: Modifying and applying Nash's rule in a service sector context

Abstract

This paper aims to demonstrate how a simple rule of thumb can form a basis to offer a rational and consistent approach to pricing decision-making when faced with (partially) unknown demand and cost functions. To this purpose Nash's decision rule (1975) is re-evaluated, modified, and applied in a service product context. The decision rule can provide management with a powerful indicator of the direction in which profit will change as the result of a change in price. It specifies the conditions under which differential pricing or discounting may be (more) profitable. In this way, the rule provides a basis for a more competitive business pricing policy. The modification to Nash's rule demonstrates that pricing can benefit from quantitative techniques which are comparatively straightforward to understand and apply. It reduces uncertainty by specifying the required elasticity of demand necessary to make change in price worthwhile. With this rule, managers have an additional tool to evaluate potential price changes in the context of particular market circumstances. The paper concludes by explaining how Nash's applied and modified rule provides an original and rational methodology for exploring whether discounting is a suitable pricing strategy for service businesses with high variable costs and inelastic demand patterns.