Question

Jones is the manager of an upscale clothing store in a shopping mall that contains only two such stores. While these two competitors do not carry the same brands of clothes, they serve a similar clientele. Jones was recently notified that the mall is going to implement a 10 percent across-the-board increase in rents to all stores in the mall, effective next month. Should Jones raise her prices 10 percent to offset the increase in monthly rent? Explain carefully.

Answer 1

Jones should not raise her prices.

The goods she sells have substitutes avalaby from two more rival firms. Since there are only three firms, this is close to an Oligopoly market structure. If Jones decreases her price, her rivals will follow suit and lower their prices, but if she raises price, others will keep their prices unchanged. Since demand is elastic (as substitute goods exist), Jones's sale will fall after price raise, and ceteris paribus revenue and profits will fall too.