This article describes how firms should price their product. In the introduction is this gem:

How much should you charge customers for your product or service? This, of course, depends on the nature of your business. There are no specific formulas. You must do some research to find an appropriate price for your specific product.

Yet, we teach price theory assuming that there are specific formulas, specifically Marginal Revenue should equal Marginal Cost. Always. The trick is accurately measuring marginal revenue and marginal cost.

The article goes on to offer a few other ideas:

"Make a list of similar products or services and how much other companies charge for them."

This sounds like "know your demand," which is one component of determining profit maximizing price and quantity. However, simply knowing what other firms are charging, i.e., market price, does not necessarily tell the firm owner what marginal revenue will be, unless the firm's demand is perfectly elastic.

The next step in determining price:

"Review Your Costs...the cost of goods or raw materials, the amount of staff time (including your time) it will take to produce the product, as well as the amount of administrative time to invoice your customers and collect payments. You also need to include general operating expenses and administrative costs (or G&A) -- when calculating the cost of your product or service."

Hmmm...the first set of costs are part of marginal cost, which we teach should be considered in profit maximizing output and pricing decisions. However, general operating expenses and administrative costs sound like fixed cost. Economists claim that fixed cost have no impact on the profit maximizing quantity-price decisions, and to consider fixed costs will guarantee that the firm owner will not maximize profit.

Finally, the article suggests a rather ad hoc markup over cost:

"Mark up for Profit...The amount of the markup varies by industry, service, potential liability and general overhead. Generally, you should at least double your fixed costs to get a selling price. In retail, this is known as "keystone" pricing. When retailers apply a discount of 10-40 percent for a sale on their products, they still make a profit because they used keystone pricing."

The optimal markup does vary by industry, according to the Lerner condition, but the "doubling of fixed costs" doesn't sound like what we teach in firm theory. Once again, the general overhead (fixed cost) is being used to determine price, which is incorrect. The so-called "keystone" pricing may yield positive profit, but would not pass muster in my price theory course.

I wonder who is "more right" and who is "less wrong" - the article's author or us economists? I will, of course, go with the economic theory, but perhaps the difficulties in accurately measuring demand (and hence marginal revenue) and cost (and hence marginal cost) are so insurmountable that firm owners resort to rules-of-thumb. I fight my brother (who is a small business owner) in this area all the time.

I wonder if the article provides a net positive or not.