Question

As consumers compare prices across firms in a market more (as they engage in more search), what happens to the elasticity of demand for the individual firms in the market? What happens to the prices that the firms charge? Does the quantity provided in the market move closer to or further away from the efficient quantity? Please explain.

Answer 1

As consumers compare prices of goods across firms in a market, elasticity of demand increases and demand becomes more elastic in nature. This is because elasticity of demand increases as consumers find cheaper substitutes in the market, or competition in the market increases.

With increased competition and price search, prices in the market fall and become more closer to the competitive and optimal price level.

Likewise, quantity moves closer to the optimal level of output due to increased price search and competition.