Choosing a Price and Cost Combination—The Role of Correlation

Often, firms can choose from different combinations of price and cost processes. For example, they can choose between different production locations or technologies, between different products to produce, or between different locations for selling them. To study the choice of the optimal combination...

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Autores principales:	Avner Bar-Ilan, Yishay D. Maoz
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	investment real-options correlation Risk in industry. Risk management HD61 Finance HG1-9999
Acceso en línea:	https://doaj.org/article/cf4a69e271f7465d9796b174cce657bc
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id	oai:doaj.org-article:cf4a69e271f7465d9796b174cce657bc
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spelling	oai:doaj.org-article:cf4a69e271f7465d9796b174cce657bc2021-11-25T18:08:37ZChoosing a Price and Cost Combination—The Role of Correlation10.3390/jrfm141105351911-80741911-8066https://doaj.org/article/cf4a69e271f7465d9796b174cce657bc2021-11-01T00:00:00Zhttps://www.mdpi.com/1911-8074/14/11/535https://doaj.org/toc/1911-8066https://doaj.org/toc/1911-8074Often, firms can choose from different combinations of price and cost processes. For example, they can choose between different production locations or technologies, between different products to produce, or between different locations for selling them. To study the choice of the optimal combination, we return to themodel that was developed by Dixit and Pindyck, where both output price and production cost are stochastic processes, and add a novel focus on how the correlation between these processes affects the firm’s decision. We find that, ceteris paribus, the firm prefers the combination with the lowest correlation between the processes, as it seeks a greater profitability variance which maximizes its value.Avner Bar-IlanYishay D. MaozMDPI AGarticleinvestmentreal-optionscorrelationRisk in industry. Risk managementHD61FinanceHG1-9999ENJournal of Risk and Financial Management, Vol 14, Iss 535, p 535 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	investment real-options correlation Risk in industry. Risk management HD61 Finance HG1-9999
spellingShingle	investment real-options correlation Risk in industry. Risk management HD61 Finance HG1-9999 Avner Bar-Ilan Yishay D. Maoz Choosing a Price and Cost Combination—The Role of Correlation
description	Often, firms can choose from different combinations of price and cost processes. For example, they can choose between different production locations or technologies, between different products to produce, or between different locations for selling them. To study the choice of the optimal combination, we return to themodel that was developed by Dixit and Pindyck, where both output price and production cost are stochastic processes, and add a novel focus on how the correlation between these processes affects the firm’s decision. We find that, ceteris paribus, the firm prefers the combination with the lowest correlation between the processes, as it seeks a greater profitability variance which maximizes its value.
format	article
author	Avner Bar-Ilan Yishay D. Maoz
author_facet	Avner Bar-Ilan Yishay D. Maoz
author_sort	Avner Bar-Ilan
title	Choosing a Price and Cost Combination—The Role of Correlation
title_short	Choosing a Price and Cost Combination—The Role of Correlation
title_full	Choosing a Price and Cost Combination—The Role of Correlation
title_fullStr	Choosing a Price and Cost Combination—The Role of Correlation
title_full_unstemmed	Choosing a Price and Cost Combination—The Role of Correlation
title_sort	choosing a price and cost combination—the role of correlation
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/cf4a69e271f7465d9796b174cce657bc
work_keys_str_mv	AT avnerbarilan choosingapriceandcostcombinationtheroleofcorrelation AT yishaydmaoz choosingapriceandcostcombinationtheroleofcorrelation
_version_	1718411585995669504

Choosing a Price and Cost Combination—The Role of Correlation

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