Shadow Pricing

Shadow pricing applies to assets that don't trade in an open market or don't get sold very often. The concept also applies to unique assets, where figuring out a potential price takes a lot of guesswork.

Looking through your great-grandpa's attic, you find what looks like a Jackson Pollock painting. You ask Gramps about it and he confims, "Yeah, I got it from that Pollock kid in 1952. He owed me money, and gave me that stupid squiggle painting instead. Deadbeat."

You'd like to know what the painting is worth, but you don't actually want to sell it. Pricing is difficult because it's one of a kind.

Here's where shadow pricing comes in.

It involves estimating a value based on other similar items. If a similar painting just sold for $25 million, then you can guess the value is...around $25 million. Of course, art appraisers get the big bucks by being able to review data on recent sales and look at details about individual works in order to make an educated guess as to market value.

Shadow pricing comes into play for companies as well. For them, the assets in question might be particular brands or product lines or intellectual properties, like a patent or a copyright.