must reflect "socially necessary expenditures of pro- 

 duction." With new product innovation, the problem 

 with the traditional system is as simple as it is se- 

 vere. As cumulative output increases, cost declines 

 for a host of reasons which collectively may be la- 

 belled "learning curve effects." While market compe- 

 tition acts to force corresponding declines in prices, 

 fixed prices will yield larger profits as the product 

 becomes increasingly dated. 



Formulating price-setting methodology and monitor- 

 ing its application are the responsibility of the 

 State Committee for Prices. Fairly recently, the Com- 

 mittee has begun to implement measures for introducing 

 at least step-wise or staged price flexibility. The 

 essence of the new techniques is described by Ivanov: 



One of the rules of price formation is that the 

 savings obtained by an innovating enterprise 

 should not exceed 50 percent of the total eco- 

 nomic gains. Prices on new articles may change 

 with time, assuring the producer fast write-off 

 of initial start-up costs as well as reasonable 

 profitability of production at all stages of the 

 'market cycle 1 of the innovation. 



Specifically, prices for items which make only 

 minor improvements or changes in existing prod- 

 ducts are established in conformity with the 

 price level of their prototypes with adjustments 

 made for the savings effected by the product im- 

 provements. Prices for radically new items are 

 established in stages. First, temporary prices 

 are fixed which include planned cost of produc- 

 tion of the new article plus a profit margin 

 that is based on the norm of profitability of 

 the enterprise for a given year for its basic 

 output. However, it should not exceed 20 percent 

 or be less than 10 percent of the planned cost 

 of production. After the expiration date of tem- 

 porary prices (when the initial costs for new 

 production have been written off) , permanent 

 wholesale prices are established for new prod- 

 ucts. In case of high quality products which 



229 



