Full-Cost Pricing and the Illusion of Satisficing

Abstract

This paper demonstrates that for a multi-product firm with fixed costs, full-cost markup rules impose a constraint on the relationship among product prices that may prevent the firm from achieving satisfactory profits even when satisfactory profits are feasible. For any given cost structure and allocation basis, there always exist well- behaved demand curves such that feasible satisfactory profits cannot be realized using a full-cost pricing strategy. Consequently, there is no guarantee that setting prices via a full-cost pricing strategy will yield a satisfactory profit--even when it is possible to earn satisfactory profits using a different pricing strategy. Factors that might mitigate concerns about full-cost pricing also are discussed.