Question

In the video lecture on equilibrium, we introduced two economics concepts - surpluses and shortages. A surplus occurs when Qs>Qd and a shortage occurs when Qd>Qs. According to economic theory, to fix a shortage a firm will increase the price and to fix a surplus a firm will lower the price. However, firms do not always react this way. For example, when I went to see a very popular movie on the release date I wasn't able to get a ticket because the theater sold out. I would have been willing to pay a higher price, but the theater kept the same price it normally charged. What are some examples where firms either allow a surplus or shortage to persist? Why do you think they don't alter the price the way economist suggest that they should? Would you do anything differently if you were in charge of that business?

Answer 1

Sellers may not charge differential prices if:

a. There is a maximum retail price allowed by law.

b. If sellers think that people may not turn up next if they sense price discrimination.

c. Consumer union pressures.

d. Any other govt. regulation

e. When there is very high competition.

Another examples: Mainly in Oligopoly market this may happen. Cold drinks market, car market telecom market.

As a producer, we can collude and prices can be changed with mutual understanding. Each company will be able to acquire new markets based on other product features and can change market potential.