Real Prices and Ideal Prices - Valuation Criteria in Pricing

Valuation Criteria in Pricing

Consequently, what the "real" price of a thing is, might be a topic of dispute, because it may involve conditions and valuation criteria which some would not accept, because they apply different valuation criteria, different conditions or have a different purpose. For example, an asset or product may be valued by accountants and statisticians at:

• its historic cost,
• its book value,
• its accounting value,
• its current market value,
• its nominal value,
• its accrual value,
• its discounted, sale, bundle or groupon value,
• its value for legal purposes,
• its gross or net value,
• its current replacement value,
• its current trading value,
• its warehouse or shop value when stored,
• its value given its current location (or locational value)
• its FOB value
• its value before or after transport costs,
• its transfer pricing value
• its value in terms of its future earnings potential,
• its insurance value,
• its value for tax purposes
• its pre-tax or post-tax value
• its depreciated value,
• its inflation-adjusted value,
• its value given a risk of loss of value,
• its value if it is traded at a specific time,
• its value in a foreign currency,
• its value at purchasing power parity
• its final value,
• its scrap value etc.

A price can be computed for each of these valuations, depending on one's purpose. Often the purpose is assumed to be self-evident, being related to a specific transaction, and thus what the price of something is, is taken as obvious. But an object or activity can in reality be priced in many different ways, depending on what valuation is relevant, or what price is negotiated. In modern banking, there are literally hundreds of additional conventions used to value assets under a variety of conditions.

In most Western countries, prices in e.g. a grocery shop or supermarket are usually fixed and non-negotiable; but in other countries (e.g. Morocco) buyers and sellers often make time to negotiate an acceptable price. Computerized inventory and payment systems using bar codes or other standard product identification systems usually require fixed (standardized) prices, i.e. they cannot easily cope with the possibility that a seller decides (for example) to sell groups of products at different prices to different customers.

The number of ideal prices used for calculations or signalling in the world vastly exceeds the number of real prices fetched. At any point in time, most economic goods and services in society are being owned or used, but not traded; nevertheless people are constantly extrapolating prices which would apply if they were traded in markets or if they had to be replaced. Such price information is essential to estimate the possible incomes, budgetary implications or expenditures associated with a transaction.

The use of ideal prices for the purpose of accounting, estimation and theorising has become so habitual and ingrained in modern society, that they are frequently confused with the real prices actually realised in trade. Prices may be viewed only as a kind of data, information, or a type of knowledge, or the information available about a money quantity may be equated with the "real thing". In addition, economists often speak of prices in such a "loose" sense, that it can lead to theoretical errors. For example, in Price Theory Milton Friedman equates "the interest rate" with "a price". Formally speaking, this is completely wrong, because the interest rate expresses a ratio between quantities of money. At most one could say, that the interest rate expresses a relationship between prices, or a relationship between costs and benefits. However, what Friedman meant was a price in a loose sense of "a cost" or "a compensation." The loose sense in which the concept of prices is used, means that the distinction between actual prices and ideational prices is lost. In turn, that means that the concept of price then stands for any kind of commercial valuation we care to make. Any activity, thing or transaction has its "price-tag", so to speak.

The knowledge of prices may have an effect influencing trading possibilities, which in turn changes the knowledge of prices. Consequently such knowledge is often kept confidential or is a business secret (see also information security and sociological aspects of secrecy). That is the most basic reason why the price system is not necessarily transparent at all, quite apart from disputes over how a price is calculated, estimated or derived.