Mean-Life Indifference Pricing for Quantity Purchases

Traditionally, consumers pay a fixed price for a quantity of items based on a presumed mean life. In many cases (i.e., federal government procurement) a sample of items is pretested to determine mean life and hence conformance to the contract. This paper suggests an alternative scheme based on a price indifference curve h(φ) which specifies the unit cost given mean life φ, which is estimated based on the actual performance of the first r items that fail. The paper develops a specific form for the indifference function and a procedure for estimating both φ and h(φ) and presents an example.