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Young and dynamic entrepreneurs are very much interested in starting up new ventures with new innovative ideas. These new ideas require funding. Every entrepreneur, be it a venture capitalist or a financier, is interested in knowing when a startup will start generating the profits or when there will be a break-even for assessing the viability of the project. Being dynamic in nature, they are interested in knowing when they will get back the funds (fixed cost) invested in the project as soon as possible, so that funds can be spared for another new innovative ideas. It is here the role of break-even analysis comes into existence. Break-even analysis is a management tool to study cost-volume-profit relationship. It is concerned with determining that level of activity where total revenue/sales is equal to total cost in narrower sense. However, its wider interpretation may refer to techniques which determines profit at any level of activity. BEP generates the information that is useful in decision making and profit planning. If sales are not equal to total cost, it cautions management to find cause and take appropriate actions to reduce fixed cost or variable cost. The objective of writing this paper is to develop the understanding how to calculate the different types of Break-even points in different business models and how they are useful in decision making, planning and control. Cases-based on real life situation have been used to explain different types of BEP. The paper will be useful to start-up business and their management in decision making.

It was grounded, that analysis of financial performance allows discovering opportunities to improve the enterprise financial condition, implements effective control over revenue and expense metrics, makes economically sound decisions based on the calculation results. The features of generating and accounting profit are distinguished, which should be taken into consideration in the course of analysis of the financial performance of business entities that do not always ensure the accuracy of information. In particular, it was found that displaying the fact of sales at the time of goods shipment distorts the financial condition (there may be situations where the entity is financially stable but insolvent); even a profitable enterprise can show the signs of bankruptcy, if its funds are invested in low-liquid assets, the accounts payable are not paid off, and the profits are not used efficiently; the income accrued throughout the entity’s operation is never equal to the amount of income accrued for each reporting period (this is due to revaluations and changes in accounting policies); the income according to the accounting data is not identical to the real (from the economic point of view) financial performance of the entity. A model of profit factor analysis, which takes into account the shortcomings of the previous model and which is based on the use of direct-costing is considered in detail. The peculiarity of this model is that the cost of production is calculated and planned only in part of the variable costs, and fixed costs at the end of each month are written off to the financial performance of the entity main activities. It is established that the current regulatory framework for income generating, accounting and analysis leads to the distortion of the real financial performance. Therefore, the concepts of economic, accounting and tax profit should be distinguished, and their relationships should be taken into account. It is proved that the results of profit and profitability analysis, including the quality of analytical studies and the rationality of management decisions made on their basis, depend on organising separate accounting for fixed and variable costs, implementing the budgeting system by the subject. In spite of the fact that in the conditions of management accounting, the method of factor analysis of profit becomes mathematically complicated, its results become more transparent from the economic point of view, and the possibilities of using information in carrying out strategic prospective analysis of financial performance expand.

Airport pricing is considered as one of the most relevant issues for policymakers. According transport policy, pricing schemes should be at least partially based on marginal costs. This article aims at comparing the most relevant aeronautical airport charges with their corresponding marginal costs for the Spanish airports in the period before the partial privatization process. To that end, we have built very detailed airport charge variables, and then, have estimated a flexible short-run variable cost function system using a panel of thirty-five airports over a 6-year period. The results show that the evolution of aeronautical airport charges does not follow the trend of marginal costs. Moreover, these charges are set above the short-run marginal costs with the exception of the smallest and insular airports. Finally, we find the existence of non-neutral technological change and excess of capacity for the Spanish airports.

We analyze the effect of game modes and investment cost locations on firms’ profits and their incentives to adopt Radio-Frequency Identification (RFID) technology. We consider a supply chain, where one manufacturer places an RFID tag on each item and sells through one retailer. The two firms can play the Stackelberg game or the Bargaining game. Specifically, under the Stackelberg game, the manufacturer dictates the wholesale price first (M) or the retailer moves first to announce the retail markup (R); under the Bargaining game, firms can bargain over the wholesale price only (O) or over both the wholesale price and quantity (B). Adopting RFID incurs both a variable cost and a fixed cost, which can be borne by the manufacturer or the retailer, respectively. Our results show that under B, whether the retailer or the manufacturer bears the fixed cost does not affect both firms’ profits. Surprisingly, under O, we observe that the retailer earns more when he bears the fixed cost than when he does not if his bargaining power is strong. Although the chain under B is perfectly coordinated, the retailer gains more under B than under O only when his bargaining power is strong. Furthermore, the retailer's incentive to adopt RFID is stronger under R than under M, and his highest affordable variable cost is higher than the manufacturer's when the fixed cost is ignored under R. Finally, both firms’ highest affordable fixed costs under R are higher than the centralized level when the variable cost is high.

We model an oligopoly where firms can choose the quality level of their products by incurring set-up costs that generally depend on quality level. If the set-up cost is independent of product quality, firms may choose to supply both types of quality.We focus on the long run equilibrium where free entry and exit ensure that the profit for each type of firm is zero. Using this framework, we study the implications of an increase in the market size. We show that for the existence of an equilibrium where some firms specialize in the low quality product it is necessary that the set-up cost for the lower quality product, adjusted for quality level, is lower than that for the higher quality product. In the case where the unit variable costs are zero, or they are proportional to quality level (so that unit variable costs, adjusted for quality, are the same), we show that an increase in the market size leads to (i) an increase in the fraction of firms that specialize in the high quality products, (ii) the market shares (both in value terms and in terms of volume of output) of high quality producers increases, and (iii) the prices of both types of product decrease. In the case where higher quality requires higher set-up cost (per unit of quality) but lower unit variable cost (per unit of quality), subject to certain bounds on the difference in unit variable costs, we obtain the result that an increase in the market size decreases the number of low quality firms, increases the number of high quality firms, and decreases the prices of both products. In the special case where the set up cost is independent of quality level, we find that all firms will produce both type of quality levels. In this case, an increase in the market size will reduce the value shares of low quality products, but will leave their volume share unchanged; and the market expansion induces a fall in the relative price of the low quality product, and in the prices of both products in terms of the numeraire good. We carry out an empirical test of a version of the model, where set-up costs now refer to set-up costs to establish an export market, and they vary according to the quality of product that the firm exports to that market. We show that the data supported the hypothesis that the average qualities of the product are higher for bigger export markets.

American jurisprudence considers price predation a largely irrational, and therefore self-limiting, business strategy which is unlikely to lead to monopolization of an industry. This paper argues that the recent rise of the negative cash flow firm upends traditional assumptions. These types of firms can achieve greater market share through predatory pricing strategies that involve long-term below average variable cost prices. It also maintains that recoupment, an essential element of any predatory pricing scheme, can be achieved without a raise of prices post predation. By charging prices in the present reflecting future lower costs based on prospective technological and scale efficiencies, these firms are able to rationalize their predatory pricing practices to investors and shareholders. These observations lead to the conclusion that price predation is a rational strategy which can foreseeably lead to monopolization. This paper then moves on to examine the conduct of Amazon, the biggest negative cash flow firm in the world. It suggests that not only is it entirely rational for Amazon to engage in price predation and a long-term strategy of monopolization but that under current corporate disclosure rules such conduct would be virtually undetectable. The negative impact of this behavior is the elimination present and future competition.

We propose a life-cycle model, where individuals facing uninsurable labor income risks choose whether to participate the stock market and make decisions on home-ownership, in an environment with social safety net and the retirement savings system. The model is motivated by the empirical finding that active stock market participation is associated with higher level of education and employment experience in the finance sector. The model exhibits good fit on portfolio choice, home-ownership, consumption pattern in the cross- section and through life-cycle. We find that the lack of stock market access, proxied by a fixed entry cost and variable costs, plays a key role in generating heterogeneous outcome in agent’s wealth accumulation, and therefore, increases wealth inequality.

The EUJS of 30 January 2020 ( Ceske drahy a.s. v. European Commission. Joined Cases C-538/18 P and C-539/18 P- ), has again dealt with the relationship between costs and prices in predatory practices when a dominant position is held. Taking into account all the cases already decided by the Court, it is concluded that there are two different methods of analysis to verify whether an undertaking has practiced predatory pricing: - Firstly, prices below average variable costs must always be considered abusive. In such a case, it is inconceivable that there should be any economic objective other than the elimination of a competitor, since every unit produced and sold represents a loss for the undertaking. - Secondly, prices which are lower than the average total costs but higher than the average variable costs can be considered abusive only if it can be shown that there is a plan to eliminate a competitor. However, exceptions to this are based on the availability of data, comparison with other sectors, consideration of the objective pursued or the opportunity to recover losses. Elements summarized in this paper.

Management errors in decision making have many sources, but errors rooted in conceptual confusions are persistent. An example is costs; difficulties arise when an organisation allocates fixed costs to product lines before assessing their profitability. Large, non-profit maximising organisations, such as universities, with a high ratio of fixed to variable costs, are particularly at risk. When key performance indicators for managers also conflate costs of different types, management of resources can go awry. Compounding the issue, economics textbooks offer contradictory definitions of, and distinctions between, costs. This paper clarifies the conceptual confusions surrounding costs to highlight the fixed cost trap in the university sector.

This paper investigates the competition between HSR and the incumbent with vertical service differentiation for Indian corridors. As Indian government plans to invest in this new technology, strategic decisions pertaining to type of corridor, speed of HSR, HSR technology, given the competition scenario on that corridor becomes vital. The strategic interactions between the operators are modelled as a three staged game between the entrant and the incumbent considering the competition over fare and frequency to maximize different objective functions i.e. Profit and Social Welfare. Speed of HSR is taken as a strategic variable in the game with two levels of high speed, {Low-H, High-H}. This model is applied on two corridors of India of different length i.e. Bangalore-Delhi (competition with airlines with length of corridor being 2400 km) and Bangalore-Mysore (competition with bus with length of corridor being 150 km). Revealed and stated preference surveys are conducted for the passengers traveling on these corridors and a discrete choice model was estimated for both the corridors. These models were used to determine the modal share in the new hypothetical scenario which were in turn used in defining objective functions such as profits and social welfare. Various game scenarios characterized by sunk and variable cost of the modes are formulated and equilibrium for all demand levels is computed for both the corridors for these different objective functions. Results demonstrates variation in Nash equilibrium for different game scenarios and hence indicates the importance of incorporating speed as a strategic variable. Changing the objective function to social welfare maximization results in different equilibrium solution for Bangalore-Delhi corridor. Thus, impact of different combinations of demand, cost structures and objective functions are explored on the market equilibrium thereby providing interesting insights in this area.

This paper assesses the effects of search costs on equilibrium prices and profits. Using an estimated model of demand and costs in a laundry detergent market, I find that some firms’ profits initially rise and then fall with search costs. Overall, the magnitude and direction of the search costs’ effects on prices and profits are heterogeneous. This is because search costs create conflicting incentives for a firm to reduce prices to attract the attention of searching consumers, yet also raise prices to harvest profit from consumers who are unaware of competing products. These effects can vary with the relationship between the firms’ actual prices and the consumers’ pre-search beliefs about prices.

The members of a supply chain all want to be treated fairly by their counterparts and they dislike unfair shares in a total pie. A retailer exhibits fairness concerns when his share of total profit is low. Existing research on green supply chain does not care about fairness outcome. This paper studies the price and carbon emission reduction decisions in a two-echelon supply chain with a fairness-neutral manufacturer and a fairness-concerned retailer. The impacts of fairness concerns are examined. We obtain several findings: (i) the retailer is better off exhibiting fairness concerns when the emission reduction cost is high; otherwise, it will suffer a loss; and (ii) when the emission reduction cost is lower, the impact of fairness concerns on the manufacturer's profit is greater; however, the impact of fairness concerns on the retailer's profit is smaller; and (iii) the emission tax charged by the government should be lower so as to induce the manufacturer to reduce carbon emissions when the retailer is more fairness concerned. Moreover, we extend the model to involve variable costs and some managerial insights are generated.

The article substantiates the importance of practical implementation of cost management measures through the application of the mechanism of production leverage for domestic enterprises. The calculations of the influence of the cost management policy and price policy on profit and the reserves of financial strength are presented. The effect of the production lever (leverage) is considered. The functional dependence that characterizes the influence of the costs structure (the share of constant and variable costs in it) and the production profitability on the production leverage effect size is analyzed. The use of the production leverage as a flexible method for obtaining the necessary information for the making optimal short-term decisions on cost management is proposed.

The general conditions of formation of prices of products is obligatory accounting of all types of expenses. In the conditions of market relations, for each enterprise, the system of objective accounting of costs and management of costs necessary for production of products (services) becomes especially important. The system of management accounting, on the one hand, allows for the accounting of production costs, and on the other – to analyze costs and assess their impact on the final result of the enterprise and the adoption of appropriate management decisions. Unlike the full cost costing system, the cost accounting system known in economic theory is based on separate accounting of fixed and variable costs, which allows to take into account the impact of fixed costs on pricing and profits from the sale of final output. On the basis of application of the device of fuzzy sets the technique of determination of rational, from the point of view of the producer, the price of production (services) in the conditions of the available uncertainty of market researches and competitive advantages of the enterprise in the market of identical production is developed. In General, instrumental support of such approach to the determination of the product price is considered as a specialized information system to support the decision-making on the product price based on the results of market research. The market determined by this yield vector can be considered acceptable for the enterprise with a value of 0.55. At the same time, it may be accepted as unacceptable, but the level of clarity of assessment will be lower, namely 0.45. As you can see, the classification was quite blurred, which is a reflection of the fuzzy initial estimates of the proposed sales volumes for a certain price corridor.

State Transport Undertakings (STUs) are key players in providing mass road transport in India. Given that they operate under high levels of government imposed regulatory constraints, it is imperative to study their efficiency levels. Given that capital is a relatively scarce resource in developing countries like India, it is important to obtain efficiency in the short-run where some inputs are fixed as well as over the long run, where all inputs are variable. The technique used for capturing efficiency is Data Envelopment Analysis (DEA). A key possible limitation of DEA models based on physical inputs and outputs is that for an inefficient firm, reduction in some or all inputs may be recommended. It may often be desirable for an inefficient firm to increase some less expensive inputs while reducing the use of relatively expensive ones. Hence, when market price data is available, it is advisable to use the cost variant of DEA. Also, it is possible to determine variable cost efficiency in the short run when some inputs cannot be varied. Such inputs are referred to as “quasi-fixed” inputs. In this paper, we examine short and long term efficiencies of select bus companies in India known as State Transport Undertakings (STUs) over a period of 10 years. Fleet strength has been used as the quasi-fixed input. It is possible to ascertain, through a comparison of shadow price of the quasi-fixed input, vis-a-vis its market price, as to whether the quantity of this input is sub-optimally small or large. It is found that by adopting efficiency enhancing practices, STUs can cumulatively reduce their operating costs to the extent of 9123.35 million dollars. Also the tendency to minimize costs is found to be declining over time. In the short run some STUs are found to operate with a sub optimally low fleet size.

Retail operation practice has empirically demonstrated that menu costs (i.e., the costs of adjusting a price) play a critical role in retailer pricing decisions. In this paper, we propose four dynamic pricing models for deteriorating products based on different pricing adjustment frequencies with and without menu costs. Under Poisson demand, we provide (1) the rank of these models in terms of expected profits and note that (2) the optimal prices of deteriorating products consistently decrease over time when menu costs are negligible. To investigate the impact of menu costs on dynamic pricing decisions, we conduct several numerical experiments based on different menu costs, decay rates, holding costs and initial inventories. The results demonstrate that (1) the one-time price adjustments typically employed in practice provide the most benefit from dynamic pricing when menu costs are moderate and that (2) it is typically preferable to adjust the price in the middle of the products shelf life rather than to make early or late adjustments. The same conclusions follow under compound Poisson demand and general customer utility functions.

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Modeling market power in electricity markets is fraught as agents compete in prices but interact daily. In deciding what supply to offer, generators need to form judgements on the supplies chosen by rivals and hence the residual demand they face. Many markets are found to have prices above competitive levels, which could be explained by Nash-Cournot behaviour or marking-up above variable costs, but these strategies may not be robust against sophisticated deviants. This paper demonstrates that (1) the Nash choice of the optimal proportional mark-up on marginal costs yields lower prices and profits than Cournot behaviour but higher prices and profits than the optimum fixed mark-up; (2) such mark-up models are robust to single firm Nash deviations, but not against more sophisticated deviations in the deterministic case, nor under demand uncertainty. Proportional mark-up models emerge as the most robust and hence preferred modeling approach.

The market for parking is characterized by intrinsic distortions such as cruising in search of a parking space and garage market power. Theoretical studies stress that the price differential between curbside and garage parking fees is critical in addressing this inefficiency; yet, the interactions between the two have received little attention to date in the literature. By drawing on a new self-constructed database for all the garages in the city of Barcelona, we empirically explore the determinants of garage prices. Our results indicate that prices are mainly influenced by fixed and variable cost drivers, the dominance position of the garage in its surrounding market and the garage’s interaction with curbside parking. We also find that prices react to the scarcity of parking spaces in the street and to the curbside price fixed by the public authority.

Purpose The purpose of this paper is to examine how debt affects the cost structure of a farm. Agency costs arise when stakeholders of a farm manage their farm differently to obtain debt which results in inefficiencies. These inefficiencies cause a farm to deviate from cost minimization strategies. Design/methodology/approach This study uses the non-parametric technique of data envelopment analysis. Through this method, a non-stochastic cost frontier is constructed where all farms must lie on or above the frontier. This allows for the analysis of how debt affects the shape of the cost frontier and for how debt affects deviations away from cost-minimizing strategy. The shadow costs of the debt constraints in the linear programming problem are used to analyze the effect of debt at the cost frontier while a series of Tobit models are estimated to examine the effect of debt on deviations away from the frontier. Findings The findings of this paper support the existence of agency costs associated with debt for Kansas farms. The addition of debt and capital constraints lowered the minimum cost frontier increasing the average efficient cost under variable returns to scale. However, for those farms on the frontier, the shadow cost of debt was negative meaning an increase in debt would lower the overall variable cost. The increase of debt was found to be negatively correlated to the efficiency score of the farms. Originality/value This paper provides value by supporting the existence of agency costs which has been disagreed upon in the literature and also providing new insights for how to analyze agency costs. Since debt was found to have a negative shadow value for those farms on the frontier but negatively correlated with efficiency scores, this suggests that agency costs affect firms differently depending on where the farm is on the cost frontier.

Technological innovation drives economic growth, and the pioneering activity of scientists and engineers produce technological innovation. We provide a mathematical model of pioneering strategic choice by adopting a perspective familiar to microeconomics, but less common in the engineering management literature. Instead of focusing on the specific features of a pioneer's technology, we focus on the malleability of the profit equation involved. By considering the arguments of the profit function (i.e., entry and variable costs and potential market demand) as strategic levers, we derive propositions that identify the ranges of actions (lever pulling) available to managers to protect (and even increase) entrepreneurial rents in a simple yet robust partial equilibrium case. For each lever, we show that there are several value ranges (intervals) and that the pioneer's incentives vary across these intervals. In addition, for each lever, we identify the existence of nontrivial profit discontinuities that change the pioneer's incentives in surprising ways and lead to counterintuitive strategic choices. Lastly, we show that for some range of each lever's values, welfare-improving transfer payments are possible and, therefore, pioneers and policy-makers both have an incentive to bargain. As in the case of patents, these transfers encourage the introduction of new technologies.

Due to the fact that a consumer’s willingness to pay differs between segments, many unregulated industries are price constrained, although the specific costs of market segments also differ. If the product quality is endogenously chosen, we find that third-degree price discrimination increases welfare if a sufficiently pronounced complementarity between the willingness to pay and variable cost heterogeneity is given. This is due to the fact that the monopolist’s incentive for employing a pronounced price dispersion strategy is directly influenced by the consumers’ willingness to pay for the quality of a product. With endogenous product quality, the paper shows that the standard welfare result of third-degree price discrimination compared to uniform monopoly pricing (e.g. that total welfare and consumer surplus both fall if total output does not rise) can be only reversed given the complementarity is sufficiently pronounced.

Qualified management aimed at optimizing financial results is the key factor in today's society. Effective management decisions depend on the necessary information about the costs of production process in all its aspects – their structure, types, accounting policies of reflecting costs. General production costs, the so-called indirect costs that are not directly related to the production process, but provide its functioning in terms of supporting structural divisions and create the necessary conditions of production, play a significant role in calculating prime costs of goods (works, services).However, the accurate estimate of prime costs of goods (works, services) should be determined with the value of indirect costs (in other words, general production costs), and properly determined with the base of their allocation. The choice of allocation base of general production costs is the significant moment, depending on the nature of business, which must guarantee fair distribution regarding to the largest share of direct expenses in the total structure of production costs.The study finds the essence of general production costs based on the analysis of key definitions of leading Ukrainian economists. The optimal allocation approach of general production costs is to calculate these costs as direct production costs within each subsidiary division (department) separately without selecting a base as the main one to the their total amount.

In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.

Organizational- and departmental-level budgeting suffer from various shortcomings, such as asymmetric ratcheting. In this regard, we theorize, and propose, budgeting at the transaction-cycle level for effective budget designs. The transaction-cycle level budget requires management justification for resource assignment to business processes, often spanning multiple departments. The transaction-cycle typology consists of five cycles: production, expenditure, financial, revenue, and human-resources. In order to distinguish among transaction cycles, we use their relative positions within the value chain and technology content in their business processes. As a proof-of-concept, we develop theoretical arguments for asymmetric ratcheting in operating budgets at the transaction-cycle level in hospitals, and empirically examine this phenomenon using longitudinal archival data. Our hypotheses examine budgetary responses to overspending and underspending variances in operating budgets for fixed and variable costs. Our findings suggest that a transaction cycle's position in the value chain and its technology content play a role in determining asymmetric ratcheting during budgeting. We discuss our contributions from the perspectives of theory and practice of accounting, budgeting, and accounting information systems.

This paper examines the theoretical properties of full cost transfer prices in multi-divisional firms. In our model, divisional managers are responsible for the initial acquisition of productive capacity and the utilization of that capacity in subsequent periods, once operational uncertainty has been resolved. We examine alternative variants of full cost transfer pricing with the property that the discounted sum of transfer payments is equal to the initial capacity acquisition cost and the present value of all subsequent variable costs of output supplied to a division. Our analysis identifies environments where particular variants of full cost transfer pricing induce efficiency in both the initial investments and the subsequent output levels. Our findings highlight the need for a proper integration of intracompany pricing rules and divisional control rights over capacity assets.

This chapter provides an introduction to multi-product monopoly pricing when the variable costs are linear. Profit maximization problems with linear variable costs arise from capacity constraints, where the firm maximizes the expected profit net of the opportunity costs of the capacities used. We argue that under mild assumptions, both the optimal profit function and the expected consumer surplus are convex functions of the variable costs. Consequently, when variable costs are random, both the firm and the representative consumer benefit from prices that dynamically respond to changes in variable costs. Randomness in variable cost is often driven by randomness in demand in conjunction with capacity constraints, and this accounts for some of the benefits of dynamic pricing. We explore conditions for the existence and uniqueness of maximizers of the expected profit and analyze in detail problems with capacity constraints both when prices are set for the entire sales horizon a priori, and when prices are allowed to change during the sales horizon. The firm’s problem is discussed in Sect. 8.2, while the representative consumer’s problem is presented in Sect. 8.3. The case with finite capacity is discussed in Sect. 8.4. Details about existence and uniqueness for single product problems are discussed in Sect. 8.5. This section also includes applications to priority pricing, social planning, multiple market segments, and peak-load pricing. Multi-product pricing problems are discussed in Sect. 8.6.

Last decade has witnessed a booming development in renewables and significant changes in the generation mix around the world. Given their relatively low variable costs, renewables are expected to be cleared first in the electricity market and earn profit margins under a marginal pricing mechanism to recover their fixed costs. However, some strategic price manipulation behaviors may distort the spot price and cause market failure. In this article, we show that thermals could exploit cross-product arbitrage possibilities through long-term contracts under high renewable penetration, and thereby lower spot prices and squeeze renewable profit margins, discouraging future renewable investments. We build a bi-level model to study strategic behaviors of thermals discussed above and their impacts on the market equilibrium. The model can be recast as a mathematical problem with equilibrium constraints (MPEC) and further formulated as a mixed integer linear programming (MILP) after proper linearization. We then use internal rates of return (IRR) and minimal acceptable rates of return (MARR) to evaluate impacts of thermal arbitrage on renewable investments. A case study is performed to validate the model using the CAISO data. Finally, we provide policy recommendations to regulate this specific type of strategic behaviors.

For society and industry alike, efficient allocation of resources is crucial. Numerous tools are available that in different ways rank available options and actions under the aim to minimize costs or maximize profit. One common definition of economic efficiency is least cost per unit supplied. A definition that becomes problematic if cost take negative values. One model, where negative costs are not uncommon, is expert based/bottom up [marginal abatement] cost curves. This model is used in many contexts for understanding the impact of economic policy as well as optimizing amongst potential actions. Within this context attention has been turned towards the ranking problem when costs are negative. This article contributes by widening the discussion on the ranking problem from the MACC context to the general definition of least cost per unit supplied. Further it discuss why a proposed solution to the ranking problem, Pareto optimization, is not a good solution when available options are interdependent. This has particular consequences for the context of energy systems, where strong interdependencies between available options and actions are common. The third contribution is a proposed solution to solve the ranking problem and thus how to define economic efficient when costs are negative.

In a two-period duopoly setting in which switching costs are the only reason why products may be perceived as differentiated, we provide necessary and sufficient conditions for switching costs to lead to higher prices in the first period as well as to higher overall profitability. We show that this happens if and only if switching costs are not too large. We present the only treatment up to date of how switching costs (and only switching costs) affect competition based on the assumption that switching costs differ across consumers, which allows us to illustrate the undesired byproduct of assuming that products exhibit substantial horizontal differentiation. Not only do we draw implications for the classical literature on competition with switching costs, but also for the more recent one that rests upon such an assumption too.

This paper presents the valuation of real options and the capital budgeting models within shadow costs of incomplete Information and short sales. Shadow costs are sunk costs in the spirit of Merton's (1987) model of capital market equilibrium with incomplete information. The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu, Li and Wei (1996) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales. Shadow costs are used in standard discounted cash flow techniques and real options. The justification of shadow costs in real projects is based on the observation that R&D needs to be done before investment decisions. The main results regarding real options and shadow costs of incomplete information and short sales are proposed by extending the analysis in Bellalah (1999 , 2000) and Bellalah and Wu (2009). Our results have important implications in terms of pricing derivative assets and different types of real options. In particular, this framework can be easily implemented in investment decisions and the valuation of flexibility embedded in real projects. In fact, several investment decisions under uncertainty can be reformulated and their results can be implemented in the presence of incomplete information and investment constraints.

I investigate the effects of switching costs on the market outcome in network industries using a dynamic duopoly model of price competition in the presence of an outside option. I find that the role of switching costs depends on network effects and the outside option. Without a viable outside option, high switching costs can neutralize the tendency towards high market concentration associated with network effects, but with a viable outside option, switching costs increase market concentration. Furthermore, switching costs lower prices if network effects are modest and there exists a viable outside option, but generally raise prices otherwise.

We consider an economy in which the technology exhibits nonconvexities due to fixed costs associated with production. Taking into account the incentives for investment to decrease fixed costs, we characterize the circumstances under which an underdeveloped economy can catch up with the developing ones. We show that it is optimal to get rid of the fixed costs inherent in production in finite time provided that the initial level of fixed costs are not too high and the technology for reducing fixed costs is sufficiently efficient. Indeed, we obtain that even though the income disparities may be very persistent and can be perceived as poverty traps, economies with not very high initial fixed costs and sufficiently efficient technology for reducing fixed costs would ultimately converge to the same steady state level of per capita income.

The impact of transaction costs on the early emissions trading market is examined by applying an agent-based model and simulation (ABMS) approach. For a realistic model set up, bounded rationality, stochastic characteristics, and learning-by-doing are considered in our search processes. Marginal abatement cost parameters are obtained from Yoo et al. (2010) , which is an experimental study on the emissions trading in the Korean power sector. Sensitivity analyses are performed on market performance indices with regard to transaction cost parameters, which represent scales and the learning elasticities of transaction costs. A total of 960 simulations were run in this sensitivity analysis. Sensitivity analysis results consistently show that higher transaction costs worsen market performance. The most remarkable finding in these results is that welfare performance of all the transactions decreases by up to 50% as the scale parameters of transaction costs increase, implying that welfare gain from introducing emissions trading disappears significantly. However, with learning curve effect, welfare performance could be regained by up to 26%. In sum, although transaction costs significantly encroach upon trade gains at the early stage, based on our simulation results, the welfare loss by way of transaction costs is lessened as the knowledge of market participants progresses.

This paper discusses challenges that relate to assessing and properly incentivizing the resources necessary to ensure a reliable electricity system with growing penetrations of variable generation (VG). The output of VG (primarily wind and solar generation) varies over time and cannot be predicted precisely. Therefore, the energy from VG is not always guaranteed to be available at times when it is most needed. This means that its contribution towards resource adequacy can be significantly less than the contribution from traditional resources. Variable renewable resources also have near-zero variable costs, and with production-based subsidies they may even have negative offer costs. Because variable costs drive the spot price of energy, this can lead to reduced prices, sales, and therefore revenue for all resources within the energy market. The characteristics of VG can also result in increased price volatility as well as the need for more flexibility in the resource fleet in order to maintain system reliability. We explore both traditional and evolving electricity market designs in the United States that aim to ensure resource adequacy and sufficient revenues to recover costs when those resources are needed for long-term reliability. We also investigate how reliability needs may be evolving and discuss how VG may affect future electricity market designs.

Undoubtedly, no specific method exists to measure the cost of displeasure among employees due to unpleasant or non-ergonomic work conditions. Despite the financial impact of these hidden costs on organizations’ performance, these types of expenses are usually ignored. The intangible costs are insubstantial and represent expenses that have no common quantity or labeled value attached to them. Estimating intangible costs related to work conditions based on stress level among employees is a technique that attempts to formulize a multidimensional relationship between input qualitative variables related to the state of work conditions or work injuries and the monetary value of the hidden costs encountered with them. This technique approaches the problem from a unique standpoint, revealing the concealed effect of the state of disorder of the production system and the stress level among employees that impact the overall efficiency. In addition, the influence of the stress level on the invisible costs of the optimal amount of labor and capital due to reduced ergonomic work conditions will be investigated over both the short run and the long run. Finally, the effect of work conditions on profit-cost-volume and the breakeven quantity will be formulated.

Many car characteristics, for instance cabin space and engine power, have a positive impact on fixed and variable costs. We extend the hedonic model, that considers only one type of cost, to the situation in which fixed as well as variable costs depend on the characteristics of the durable and derive an expression for the full willingness to pay for characteristics that takes into account the impact on fixed as well as variable costs. We apply the model to the demand for automobiles using rich Danish register data. Estimation reveals considerable heterogeneity and a non-negligible contribution of the variable costs in total willingness to pay. Next we show that under suitable assumptions a structural interpretation of our estimates is possible. We show that the willingness to pay per kilometer driven can be interpreted as a parameter of the utility function and study how it is related to household characteristics. Finally, we illustrate the model by computing how consumers change car quality in response to an increase in the fuel price.

Growing public pressure, stricter environmental standards but also the awareness that greener supply chains can be more attractive for investors have made it more important than ever for firms to go “green.” While scholars have investigated technological production options, recycling and logistics flows, there is no research that studies the interplay between emissions and the costs of the supply chain contingent upon the production volume allocation and the energy mix. The results, based on a case study in the German automotive industry, show that by optimizing the energy mix, the CO 2 emissions of the supply chain can be reduced by 30% at almost zero variable cost increase.

The Ontario Energy Board recently heard an application from incumbent demand response providers claiming that changes to the system operator’s demand response-only capacity auction to allow certain generators to participate were unjustly discriminatory. The claim was based on costs borne by demand responders when curtailed that would not be recovered without energy payments. Using basic economic theory this paper analyzes the implications of variable costs of demand response and how they should best be handled to preserve economic efficiency of dispatch.

This descriptive research aims to describe cost profit, volume analysis and show its use in determining the minimum production quantities that must be produced and sold in various conditions where changes in selling prices, changes in variable costs, changes in fixed costs or changes in the composition of the sales mix. Do these changes have an impact on cost profit volume analysis or BEP?This study also aims to apply the use of Cost profit volume analysis in sales or production planning, planning for normal selling prices, planning for production methods and determining the plant's closing point (shut down point)The results showed that: 1. BEP can change because of a. there is a change in the selling price while the costs are fixed, there will be a change in the Break Even Point , if there is an increase in the selling price it will decrease the BEP point. And vice versa if there is a determination of the selling price it will raise the BEP point. b) changes in variable costs with fixed selling price conditions, there will be a change in Braek Even Point points in proportion to these changes, i.e. if an increase in variable costs will increase the BEP point. And vice versa if there is a variable cost determination will reduce the point BEP.c) changes in fixed costs with the variable costs and fixed prices, there will be a change in the Braek Even Point point proportionally to these changes, if an increase in fixed costs will increase the point BEP And vice versa if there is a fixed cost determination will reduce the BEP point. 2. BEP can be used for sales or production planning in order to obtain the desired profit. 3. BEP can be used for planning the normal selling price, ie the selling price of a product that can help the company achieve the desired profit target.4 BEP can be used in the selection of production methods (labor intensive or capital intensive) .5 BEP can be used to close the company or not.

A company runs its own business merely to obtain and to gain an advantage and profit. The profits amount obtained is presumed as an indicator of both success and failure of company through its management performance. Therefore, It is essential for the management to have their profit planned anually. Applying break-even point analysis tools is one of the way taken in planning the profit. Determining the magnitude of break-even point applied and profit planning achieved by PD Rahmat MA in 2017 and 2018 was the aim of this study. The data used is based on sales, fixed costs and variable costs in 2017 and 2018. The results taken through this research shows that the costs spent each year increase as production and income increase as well. The performance of the company has considerably optimized in order to improve sales to be over the break-even point. Profit planned is 20%, yet surprisingly the company has somehow exceeded the target of expected profit.

This study formulates three fundamental extensions of the standard optimal road use analysis: (1) considering fuel and emissions as variable costs, (2) maximizing the social welfare inside ...

The first part of this paper develops a theoretical model of fiscal equalisation to derive an optimal equalisation formula that has general applicability for federations. If vertical equity is achieved by the central government and horizontal equity by interstate migration, the welfare-maximising role of fiscal equalisation is to support an efficient distribution of different labour types across states. The theoretical model further develops work by Boadway and Flatters and by Albouy with some Australian-oriented extensions. Under optimal equalisation, full equalisation is applied when a state government achieves a fiscal advantage by using source-based taxes to raise revenue from non-residents (e.g. mining royalties) or from spreading its fixed costs over a large population. However, efficiency also dictates that equalisation is limited to fiscal advantages arising from differences in state population composition when applied to revenue raised from residents (e.g. via labour or consumption taxes) or to the variable costs of government. Simplifying assumptions are discussed. The second part of this paper applies the optimal equalisation approach to Australia using, as a base, the Commonwealth Grants Commission (CGC) assessments for 2017/18 and 2018/19. 2016 Census data is used to measure the impact of each state’s population composition on its ability to raise revenue from residence-based taxes for use in applying limited equalisation. The gain in consumer welfare of moving from the current Australian full equalisation system to optimal equalisation is estimated. Policy alternatives that are found to be inferior to the current full equalisation system include no equalisation, half-equalisation and the donor relief equalisation schemes recently recommended by the Australian Productivity Commission.

We investigate optimal rationing of resources and organizational slack when a principal procures from an agent with private information about fixed and variable costs. We study the problem in a two‐period setting with persistent types and investigate how the optimal rationing and slack depend on whether production increases or decreases over time. We find that rationing in a dynamic model with persistent types is extra costly, since the types that are eliminated in period 1 might have been attractive in period 2. The cost of rationing increases with the variability of production. If production levels are increasing (decreasing), the principal will be cautious when eliminating types with low variable (fixed) costs in period 1, since these types are particularly profitable in period 2. When production is more stable over time, harsher rationing can be applied in period 1, followed by less harsh rationing, if any, in period 2.

We examine oligopoly models of vertical product differentiation in which producing firms face variable costs of quality development. We show that comparing to private oligopoly, mixed oligopoly – whereby state-owned enterprises (SOEs) and private firms coexist – enhances social welfare but reduces firms' profitability. We also demonstrate that Bertrand competition makes firms better off under mixed oligopoly but it makes firms worse off under private oligopoly compared with Cournot competition. These findings help to justify both the existence of SOEs and the efficiency of SOEs and private firms in mixed markets in transitional economies.

The New Keynesian Phillips curve (NKPC) driven byunit labor costshas been criticized for failing to match inflation dynamics and for failing to explain the duration of price contracts. This paper extends recent attempts in the literature to improve the fit of the NKPC, by introducing a fuller marginal cost proxy,unit total costs, that is derived from bothlaborandnonlabor unit costs; the latter include capital-related costs and production taxes. Borrowing costs are examined separately, as in the cost channel literature.Unit total costsare shown to improve the fit of the short-run variation in inflation and strengthen the empirical support for the role of expectations-based inflation persistence. They also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys. Thecost channelbecomes relatively less important whenunit total costs, rather thanunit labor costs, are used as a marginal cost proxy.

Despite the clear prescription from economic theory that a firm should set price based only on variable costs, firms routinely factor fixed costs into pricing decisions. We show that full-cost pricing (FCP) can help firms uncover their optimal price from economic theory. FCP marks up variable cost with the contribution margin per unit, which in equilibrium includes the fixed cost. This requires some knowledge of the firm's equilibrium return, though this is arguably easier a lower informational burden than knowing one's demand curve, which is required for optimal economic pricing. We characterize when FCP can implement the optimal price in a static game, a dynamic game, with multiple products, and under a satisficing objective.

We studied competition in multi-echelon supply chains with a distributive structure. Firms in the supply chain are grouped into homogeneous sectors that contain identical firms with identical production capabilities that all produce exactly one undifferentiated product. Each sector may distribute its product to several different downstream sectors, and each sector is only supplied by a single upstream sector. The demand curves in final markets are assumed to be linear, as are the variable costs of production in all sectors. Competition is modelled via the successive Cournot model in which firms choose production quantities for their downstream market so as to maximise their own profits, given prices for the input. Under these assumptions, equilibrium prices, quantities and firm-level profits for any multi-echelon distributive network can be derived. We discuss the network transformation properties, and using these properties, we examine the effect of demand parameter changes and cost changes on any firm’s...

This paper discusses the relevant cost standard for the economic replicability test for Next-Generation Access (NGA) networks, described in the “Recommendation on consistent non-discrimination obligations and costing methodologies” adopted by the European Commission. According to the Recommendation, in order to reconcile investment and competition, wholesale prices should have nonlinear characteristics and only partly vary by the number of accesses. It demonstrates that a cost standard for the economic replicability test, which implies fully fixed and variable cost recovery for the access seeker, including the total wholesale price, would be incompatible with the economics of NGA networks and that such a test would deter NGA investment. Therefore, the cost standard should include only the variable part of the wholesale price. However, this paper underlines that during a transition phase, until competitors have secured access to NGA infrastructure, a second temporary test called the “competition migration test” should be added to ensure incumbent NGA retail prices do not foreclose efficient copper-based entrants. The two proposed tests surpass the limits of the “ladder of investment” theory by including the “business migration effect” developed by Bourreau, Cambini, and Dogan (2012).

Under the assumption of zero correlation between cost ratios and expected investment returns we analyze the impact of proportional investment costs. We consider a constant relative risk aversion investor optimizing expected utility from terminal wealth and identify, in addition to the direct effect due to the additional costs incurred, an indirect effect. The indirect effect is due to lost investment opportunities and a less risky stock position induced by investment costs. By use of an indifferent compensation measure, defined as the minimum relative increase in the initial wealth the investor demands in compensation to accept incurring investment costs of a certain size, we quantify the impact of investment costs. We obtain for realistic parameters that the indirect effect is between half and the same size as the direct effect, and that the investment decision seems to be of very little importance compared to the size of the investment costs.