Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Austrian Economics, a lens on everyday reality -- Ignore unavailable to you. Want to Upgrade?

To: Neocon who wrote (70)	12/14/2001 5:19:21 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 445

Neocon - I see that some things that I posted on other subjects may be useful here. The following is a description of how prices are determined in cases where monopoly is a possibility - Message 16787043 Of course you're correct, but what I said about price determination is true in general, and just needs to be broadened a bit. I claimed that all prices are set just high enough to face elastic demand above, so that any further increase in price will reduce total revenue. There are three possible different effects that potentially create this price elasticity of demand above and they come into play at three different price levels. At the lowest price level of the three is actual competition. Each one of two or more actual suppliers will face elasticity of demand above as he will lose market share as he raises his price above the competition, assuming that the competition has the capacity to fill that extra demand. This price level is not only the lowest, it also has the sharpest gradient and best defined threshold of revenue loss versus price increase and an immediate effect. At the next price level is potential competition. At some price level, a monopoly supplier will face new competitors drawn in by potential profits that are larger than those available from other investment possibilities. This price level is higher than for actual competition, and is potentially just as sharp in gradient, but is far less well defined in threshold price level, as well as being delayed in time. At the highest price level a monopoly supplier faces only the competition of all other products and services that may compete for the disposable income of consumers. This has a very weak gradient and no threshold price level at all, but is again immediate in effect. These three conditions, to the best of my knowledge, cover all the possible conditions of supply, monopoly or not. In all cases the price that a given supplier attempts to set is the one that is as high as possible without intruding into an elastic price region above. This price selection process is subject to error in the estimation of demand, and will be slightly modified by variable profit margin conditions that may exist, but, in general, is the controlling mechanism. Whether you talk about gouging or overpricing or whatever, you are making a judgement that you have no right to make, except for the case in which you are the potential buyer. All economic values are subjective, and the fact that someone pays a particular price is all but absolute evidence that the price was such that the subjective marginal utility of the good received was not only greater than the subjective marginal utility of the money expended, but that the buyer also proved with his purchase that the good acquired was of higher value to him than any alternate good in the world that might have been purchased with the money expended. Note from the quoted passage above, that the highest price level is also the one that maximizes the total revenue that consumers are willing to pay for that good. How can it be overpricing if it is the price that attracts the most consumer dollars? The only way for a supplier to price higher than this is if he is not acting in his own financial self-interest or if his costs are too high to get down to this level. (in which case it can hardly be overpricing). As long as producers act in their own interest, prices are set by the consumers' collective willingness to pay for a given quantity of a good. Regards, Don PS - All of the above assumes a single price on a single market for the good and no possibility of price discrimination between potential buyers.