Discuss the cost based methods of industrial pricing. Ans. The fundamental law of pricing states that it is based on the cost of production. Most companies try to fix selling prices which are based on their costs of production. This more true of Indian companies. In India, about 68 per cent of consumer goods companies and about 89 per cent of Industrial products manufacturers take their pricing decisions based on cost of production. In most countries, including India and USA, regulatory agencies in the reforms periods used Actual Cost-based Methods for determining pre the prices of the products from regulated firms. For a single product firm, the pricing rule is based on average costs, mark up on variable costs, or fair Rate of Return regulation methods. For multi product firms one of the Fully Distributed Costs (FDC) methods is used to allocate joint and common costs among different products. For example, petroleum refining, crude oil can be converted into petrol diesel, aviation turbine fuel and kerosene in varying proportions up to certain technical limits. (1) Single Product Pricing: Many regulatory agencies aim to simulate competitive market outcome in a regulatory environment. Under long-run competitive equilibrium market price equals average and marginal costs. Equality of price and marginal costs is necessary for economic efficiency in the Paretian sense, while equality of price and average costs is required for the existence of a private firm. If a regulated firm is required to cover its costs, and if å uniform price is needed, then the price must be equal to average costs. Using costs data for a test period, regulatory agencies classify accounting data under operating (variable) and capital (fixed) costs. Many problems arise in valuing capital base and in determining the rate return or capital situation.
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