Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/205284
Authors: 
Kamphorst, Jurjen
Mendys-Kamphorst, Ewa
Westbrock, Bastian
Year of Publication: 
2018
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2018-095/VII
Abstract: 
According to standard economic wisdom, fixed costs should not matter for pricing decisions. However, outside economics, it is widely accepted that firms need to increase their prices after a fixed cost rise. In this note, we show that a liquidity-constrained firm that maximizes lifetime profits should increase its price after a fixed cost increase, if future profits depend positively on current sales. The reason is that then the optimal price is lower than the one that maximizes the current profit. Because the higher cost necessitates higher current profits to avoid bankruptcy, the firm needs to increase its price.
Subjects: 
fixed costs
sunk costs
brand loyalty
switching costs
pricing
JEL: 
D42
L11
Document Type: 
Working Paper

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