Shadow Pricing
| Shadow Pricing |
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Shadow Pricing also called Shadow Price, is a term which is used mainly in reference to the monetary values which are assigned to the currently difficult to calculate or unknowable costs. The basis for this assumption is commonly associated with the unwillingness or an externalisation of costs due to recalculate a system to check for marginal production. When the absence of the market price occurs, the most relevant measure is based on the amount of money people are willing to pay in order to get the particular product[1].
When the Shadow Prices are used?
Shadow Prices are used usually on occasion when a particular market does not exist or in situations when market failure leads to the variance between marginal social cost and the market price[2]. In this case the shadow pricing analysts attempt to retrieve an estimate of how the market price could look like if the relevant goods were sold in the ideal market. It is also crucial to underline that these price assumptions may be different in various time periods and they may vary in the different geographic areas. The method of shadow pricing is often used on the assumption related to the new product which is planned to be introduced to the market. Moreover, this calculation and the collection of the data due to process the establishment of the shadow pricing can provide the full image of the product in terms of the market needs as well as the frequency of sale. Furthermore, in some case, the shadow pricing may reflect the equilibrium of the market. Shadow pricing is also commonly used in terms of cost-benefit analysis. During this analysis, some of the elements cannot be quantified by the two main points such as references to a cost and market price.
What are the commonly used parameters of Shadow Pricing?
During the analysis process when the price is estimated according to a predetermined formula planned to mimic the effect of the trade, the below-listed parameters are commonly used:
- the demand for the product,
- the coverage of the particular area,
- the prices range,
- the wages,
- the rations, etc.[3].
The area of usage of the Shadow Pricing
Shadow pricing is a commonly used convenient tool which easily founds its purpose in the areas such as:
- the public policy issues,
- the computer programming,
- the project evaluations of economic sectors.
What are the limitations of Shadow Pricing?
Shadow pricing has a few very important limitations such as:
- has no universality,
- is mainly based on the assumptions,
- lack of adequate data,
- cannot be available at the adequate and reliable data,
- it is a timeless and static concept,
- it is an indeterminable concept.
References
- Chavas J.P. and Cox T.L., Jesse E.(1998).Spatial allocation and the shadow pricing of product characteristics. Agricultural Economics 18, 1-19, Madison, USA.
- Dreze J. and Stern N.(1990).Policy Reform, Shadow Prices and Market Prices. Journal of Public Economics 42, 1-45. North-Holland.
- Layard R. and Glaister S.(2012).Cost-Benefit Analysis. Cambridge University Press, Cambridge, UK.
- Fukuyama H. and Weber W.L.(2008).Japanese banking inefficiency and shadow pricing. Elsevier Ltd.
- Tower E. and Pursell G.(1986).On shadow pricing. The World Bank, Washington, D.C., U.S.A.
- Warr P. G.(1979).Shadow Pricing Rules for Non-Traded Commodities. Center Discussion Paper, No. 325, Yale University, Economic Growth Center, New Haven, CT.
Footnotes
Author: Magdalena Czajka
