Assignment of New Products Under Classified Pricing: A Conceptual Dynamic Model of Class Assignment Outcomes
Nicholson, Charles F.; Stephenson, Mark W.; Novakovic, Andrew M.
The introduction of new milk-based beverages has raised the issue of which class these products should be assigned to under Federal Milk Marketing Orders. The objective of this paper is to explore the dynamics of assigning a new product to a price class under a system of classified pricing that also includes product-pricing formulae. A conceptual simulation model using the system dynamics modeling approach is used to assess how class assignment decisions affect input (producer) prices and revenues. The model includes three products: a storable product (SP), a perishable product (PP), and a “new” product (NP). The SP and PP are assumed to have stable demands for which quantities demanded change only in response to prices. The NP is assumed to have a growing demand over time, but the quantity demanded is also determined by the NP price. The storable product is assumed to be a residual claimant on the input supply, and the market price of the storable product determines the price that the manufacturer of each product must pay for the input.
R. B. 2004-01
Charles H. Dyson School of Applied Economics and Management, Cornell University