Parity Pricing - Definition & Meaning
What is Parity Pricing?
Parity pricing is the theory that the selling price of a product or service should ideally increase proportionately or rather by the same amount as the increase in the prices of raw materials or inputs.
The parity price is often used as a way of comparison along with the actual real price. The commodity’s average price over an immediately preceding 10-year period is often established as the parity price.
To understand the parity price better, we also need to look at the import parity price and export parity price. The import parity price is the price at the border of an imported good and also includes the tariff and transport cost to the purchaser’s location. The export parity price, on the other hand, is the price that the producer can get for the good being exported equal to the freight on board price with the transport costs removed.
Parity pricing is also an important concept with options. Option is a financial device that allows the holder to choose to purchase an asset at an already set price on a set date. The parity price concept comes in when the market price for selling and buying the option is equal to the intrinsic value.
Hence, this concludes the definition of Parity Pricing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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