When industries have cost structures that are based on a few high cost and volatile items, such as an industry that relies heavily on steel, index-based pricing strategies can be very advantageous.
You are an executive for a company that supplies raw materials for skyscrapers. You’re negotiating a long-term contract for reinforced concrete and steel rods, materials with the highest costs for skyscraper developers. Steel costs are also quite volatile. How might you price these materials in a way that is most advantageous for your company?
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