This paper attempts to analyse the perpetual issue of cotton yarn pricing in the handloom sector of Bangladesh which has gained both historical and contemporary relevance. It investigates the nature of yarn price variation and examines the factors governing formation of yarn price at the level of the handloom enterprises and if the existing parttern is reasonably effective in promoting allocation of yarn conducive to the healthy growth of the handloom sector. It argues that because of several limits mainly excessive price spread across most predominant counts, the existing system of yarn pricing fails to capture and sustain dynamism of the Sector. It shows that any increase in yarn price which inherently results in increased variability of returns can cause negative supply response, and points out that the widely held ‘law of supply’ may fail when generalities of risky multi-count yarn production with risk aversion are introduced simultaneously where diversification is also affected by capacity constraints in local production and import. Contrary to popular belief, it is also found that yarn traders on the average earn only normal and sometimes even below normal profit. The paper contends that price stabilization policy support would beyond any doubt benefit the handloom enterprises at large because a stable price takes account of risk reduction benefits.