Nonprofit pricing of services under cost uncertainty |
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| Authors: | Amresh Hanchate |
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| Institution: | (1) Department of Economics, Weatherhead School of Management, Case Western Reserve University, 44106-7206 Cleveland, OH, U.S.A. |
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| Abstract: | For a nonprofit organization that provides individualized services to different customers a natural rule is at-cost pricing — to cover for labor, administrative and other expenses incurred in providing the service to each customer. This not only accomplishes zero profits (losses) but also zero cross-subsidization across customers. But if costs cannot be predicted before the completion of a service, and estimates are used in obtaining such service contracts, then what should be the pricing strategy? We study such a situation facing the Intermuseum Laboratory (Oberlin, OH), a nonprofit organization that restores works of art. Two alternative pricing strategies are proposed, with dual objectives of zero cost overuns and minimum cross-subsidization across customers, and present results from a simulation of this strategy using data from the Laboratory. |
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| Keywords: | firm behavior under uncertainty nonprofit firms art restoration |
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