Pricing goods for retailers: A new approach

Abstract

In the retail sector, pricing goods is usually based on practitioner's experiences. Most of the time, the selling price is obtained by multiplying the buying price by an exogenous multiplier. However, There is no particular scientific procedure to determine such a multiplier except from the Lerner index, which is applicable only if the price elasticity of demand is inferior to −1. This paper generalizes the Lerner index to both elastic and inelastic goods by proposing an original model to determine the optimal markup for both static and intertemporal markets no matter what the price elasticity is. Finally, the paper considers the case of the social planner.