Estimating Contract Pricing with Arbitrage Condition: Application to the eBusiness Service Providers

This study examines the pricing behavior of e-business service providers. We focus on understanding the sources of market value in this young market. What explains the wide variance in prices we observe for services? What fraction of price is attributable to costs and what fraction to markup? We are especially interested in understanding how an ostensible commodity commands value. What factors correlated with successfully charging a high mark-up over cost? Our approach follows in the spirit of a long tradition in applied industrial economics. We employ econometric methods for the estimation of price cost margins. This has been a central topic in settings such as this, where complete data are not available to calibrate rich models of pricing behavior. However, we cannot directly use an existing model in the literature. Instead, we employ a new method that examines the portfolio of contracts from each firm and imposes profit maximization on the relationship of one price to another.