5 Questions
What effect does improved observability of prices by sellers have on market outcomes?
It enables tacit collusion and increases firm profits
What is the potential outcome of firms randomizing prices within an interval to confuse consumers and competitors?
It reduces competition and potentially leads to higher profits
How does better observability of prices by buyers affect market competition and firm profits?
It increases market competition and raises consumer surplus
What is the effect of imperfect observability of prices by buyers, where some can see all prices and others only one price?
It leads to price dispersion where different firms set different prices
How does transparency of prices affect the ability of firms to sustain higher prices through tacit collusion?
Transparency makes it easier to sustain higher prices through tacit collusion
Study Notes
- The video discusses the impact of information on prices on the market structure in a simplified duopoly setting with two firms producing the same product at a marginal cost of 20.
- In the case where buyers have imperfect information, if consumers can observe both prices, a Bertrand model equilibrium is reached where both firms set prices at marginal cost (P1=P2=20), resulting in no profit for the firms but maximum consumer surplus.
- When all consumers are uninformed and can only observe one price, firms have an incentive to set prices above marginal cost to exploit the lack of price transparency, leading to both firms setting prices at the maximum price of 100, acting as monopolists and reducing consumer surplus.
- In a more realistic scenario where some consumers are informed while others are not, spatial price dispersion can occur where firms set different prices simultaneously to attract both informed and uninformed consumers, leading to lower profits than when all consumers are uninformed but higher profits than when all consumers are informed.
- If firms cannot easily observe price changes of the other firm, there is a possibility of tacit collusion where both firms may maintain high prices over time to avoid potential punishment of setting low prices in the future, hurting consumer welfare.
- The equilibrium in such a setting may involve randomizing prices within an interval (40 to 100) to confuse consumers and competitors, reducing competition and potentially leading to higher profits.- Transparency of prices allows firms to easily detect competitors' price changes, making it easier to sustain higher prices over time through tacit collusion based on punishment threats.
- Better observability of prices by buyers leads to increased market competition, raising consumer surplus and lowering firm profits.
- Improved observability of prices by sellers increases the likelihood of tacit collusion, enabling firms to set higher prices and increase their profits at the expense of consumer surplus.
- Imperfect observability of prices by buyers, where some can see all prices and others only one price, can lead to price dispersion where different firms set different prices for the same product.
This quiz explores the effects of information availability on pricing strategies in a duopoly market, covering scenarios of perfect information, imperfect information, price dispersion, tacit collusion, and randomizing prices. Learn how transparency and observability impact market competition, consumer surplus, and firm profits.
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