The long queues represent the high demand for the given restaurant’s foods and service. The people value the restaurant high and are willing to stand in the waiting lines. The people have high opportunity cost associated with the time spent in the line. On the other hand, the restaurant with empty chairs may have high prices which make their food and services unaffordable to a large number of customers.
The owner can increase the price because of the high demands. Demand curve is negatively related to the price. As the prices in the restaurant menu increase, there will be a section of people who will not be able to afford the food and services at the given price. This will eventually bring down the demand and the lines in front of the restaurant will decline. The people will substitute the given restaurant with other restaurants having lower prices which are affordable to them. The section of people who substitute the popular restaurant will lead to reduction in its market share.
As the prices increase, the firm can improve its quality and services with the increased profits. The section of society that it now caters to, represent the better-off section. They are willing to pay high prices for the services. Also, they provide hefty tips to the workers. This acts as an incentive for the restaurant to gain higher profits with reduced chaos of queues handling. The costs of the restaurant also decline as they do not have to manage the long queues.
Whereas, for the restaurants facing lower demands; it is advisable to reduce the prices. The reduced prices will attract more customers. As the prices drop, the firm is able to increase the affordability of the people. The market share of the restaurant increases because the declined prices acts as an incentive for the new customers to try-out the food and services. As the price has a negative relation with the price, the demand for the restaurant with lower prices will increase and the empty chairs will be filled by new customers.
Figure 1: As the prices in the popular restaurant increases, its quantity demanded contracts and the equilibrium can be achieved.
Figure 2: As the prices in the restaurant decreases, its quantity demanded extends and the equilibrium is achieved.
In the perfect competition, there are many sellers (Manesh & Karimani, 2017). The seller is a price taker. Seller takes the industry determined prices given by the market demand and supply. In the perfectly competitive market, homogeneous products are sold and there are close substitutes available (Azevedo & Gottlieb, 2015). The availability of homogenous goods and close substitutes makes the demand of an individual seller volatile. All the sellers charge the same price as charging high price will result in the loss of market share. They cannot lower their price below the market determined price or else they will have to suffer the losses. Also, there is free entry and exit in case of perfect competition (Tao, 2010).
In the given condition when the quantity of the seller is restricted in the short–run, there will be a fall in his market share. The people can switch to the other vendor selling the same product at the same market price. This will lead to losses due to decreased market share. The seller will not be able to gain the normal profits as well in the short-run. His profits will fall short of the competitive equilibrium profits. This can be illustrated from the given diagram.
Figure 3: Price determination in a perfectly competitive market.
The above mentioned restaurants do not exist in a perfectly competitive market. If it were the case, no long queues would have been there as people can switch to close substitutes. Increasing prices in the perfectly competitive market will result in complete loss of market share as all the other firms will provide homogeneous goods at low prices. There will be easy substitution at no cost and firm will not be able to sell anything. On the other hand, lower prices will lead to market capture. The seller in this case will experience losses.
Restaurants in a perfectly competitive market would provide same quality and quantity of food. Each firm’s product will be same and substitutable with the other products and services in the market. They will have to take the market prices determined through the market demand and supply. Thy will all sell same type of food, cuisines and services. Any firm in a perfect competition can enter or exit the market at almost no cost. All the sellers will charge same prices for their homogeneous products.
Perfect competition does not exist in the contemporary world. In the real world, there is cost associated with the entry and exit of the new firms. Each new firm requires certain permissions from the food commission of the state and has to go through quality checks and controls. Each restaurant provides food of different types. A restaurant may provide Continental, Chinese, Asian, Mexican, Italian other types of cuisines. There are different chefs and they hold different qualifications. No two people can cook exact same food. Thus, the product and service quality varies from one restaurant to the other. Each restaurant specialises in different cuisine and foods. Each restaurant charges a different price for its commodity. In the practical world, services are not homogeneous in nature and vary from seller to seller and with customer to customer.
A firm can choose to provide some of its customers with special treatment and exclusive products. The exclusive treatment to a customer can be in the form of personal attention, discounts, membership points, offers, coupons, personalised food items, complementary desserts and other products and services (Zhang et al., n.d.).
The exclusive treatment provided to a customer has many benefits. The exclusive offers and prices increase the customer satisfaction and builds strong relations with the firm (Barlan-Espino, 2017). This creates preference in the minds of the individual customers who feel satisfied (Hanaysha, 2016). They choose to go to the same restaurant frequently to avail discounts and other benefits. They lead to positive marketing of the firm by the ‘word of mouth (Zhang et al., 2014)’. They promote it amongst their family and friends. This builds a strong customer-business relationship. The customers become loyal towards the brand which is very important in the contemporary world of fierce competition (Haghighi et al., 2012). A customer prefers to go to a place where he is given personal attention by the friendly staff. This is beneficial for all the firms in the long-run and the probability of their survival at the time of economic or financial crisis improves.
Monopoly is a form of market where there is a single seller who sells a unique product (BYU Idaho, 2018). No other firm in the industry provides a product close to his. The monopolist has the bargaining power because the customers have no other alternative for the product. They have to purchase the product at whatever price the monopolist sells to them. There are super-normal profits associated with the monopoly form of market.
When a monopolist chooses not to sell product to certain people, he restricts the quantity supplied in the market. Being the only seller, he has the full control over the market supply and can influence the prevailing prices (Yao & Gan, 2010).
Figure 4: Inefficiency in the monopoly market compared to perfectly competitive market.
There is lower quantity provided at higher price in case of monopoly. There is dead-weight loss (DWL) in the market of monopoly.
(BYU Idaho, 2018)
A monopoly sells lesser quantity then the market prevailing quantity. It is lesser than the quantity supplied in case of competitive markets. When the monopolist reduces the quantity from Qpc to Qm, the producer surplus falls (Nicolae Marius Jula, 2013). The higher price reduces the consumer surplus compared to the one in the perfectly competitive market (Seim & Waldfogel, n.d.). As monopoly restricts his quantity, dead-weight loss is created. This is the portion which neither goes to the seller nor the buyer. No one benefits from this outcome and this reduces the efficiency of the market. This makes monopoly unfavourable in an economy from the social perspective (BYU Idaho, 2018).
In the given case, the monopolist restricts the quantity supplied while charging low prices. This build the confidence of his customers to whom he sells. They become loyal to the brand. The goods acquire a social value. Even at the low prices the customers are attracted towards it. People are curious to buy its product or avail his exclusive services. Increasing the price in this case will lead to dead weight losses and negative marketing of the firm. There are deadweight losses created which do not produce market efficient outcomes.
In the given case, the monopoly is able to charges differential prices from different customers because of the difference in the rice elasticity of demand (Cheny & Schwartz, 2013). Some customers are willing to pay higher for the same commodity, which enable the seller to charge different prices. They are not bothered with the illegal aspect of the transaction. Since the demand for the commodity is very high, the seller can provide services to the people who are willing to pay higher and refuse to the others. Extra is charged from the customers for special reservations or priority seating. This can also be viewed as the price paid for the opportunity cost of time.
Since the differential price of this kind is illegal; if a customer offs to pay extra, the seller takes it illegally. This is not reported in the books of transaction. The seller is able to evade the tax. This type of transaction enables the monopolist to earn profits higher than his super normal profits in a normal market. Not only is he able to earn super normal profits but also gains from the extra amount paid by the customers without having to pay tax.
Figure 5: Gains from differential pricing to a monopolist.
(Ternopil State Medical University, 218)
Considering the two cases of perfect competition and monopoly we have:
|
Basis |
Perfect Competition |
Monopoly |
|
Price |
Equilibrium Price, PC |
PC |
|
Quantity |
Equilibrium Quantity, QC |
QM |
|
Consumer Surplus |
APCC |
APMM |
|
Producer Surplus |
PCCG |
PMMFG |
|
Dead-weight Loss (DWL) |
Nil |
MKFC |
The seller gains from restricting the quantity at QM. The individual is able to charge higher and increase his surplus even by keeping his price legally low at PC (Ternopil State Medical University, 218). In the given case, the seller charges PM in actual while showing PC in the books. PMPCKM (reducing the consumer surplus from APCC to APMM) is the profit by charging extra which increases the producer surplus to PMMFG. The demand curve is price elastic.
There are efficiency losses in the monopoly form of market (Misra, 2013). The price charged is high and the quantity supplied is low. There is dead-weight loss attached with monopoly which is gained neither by the consumer nor by the supplier.
When a seller charges high or low from some of the customers, it influences the level of competition in the industry (Toni et al., 2017). When the charged prices are low or high, the new sellers may fear to enter the market. They might fear the high costs and low profits prevailing in the industry. High pricing level discourages new sellers who assume the costs and the quality standards to be high which decreases the scope of profits. The low prices on the other hand, discourage new entrants who assume the profits and the quality standards to be low. The government provides laws for the price discrimination which may tend to increase or decrease the competition level.
Price discrimination has been legalised given it is executed on fair grounds. The Competition Policy Reform Act (1995) of Australia provides details regarding price discrimination which can be anti-competitive and at times pro-competitive (OECD, 2010). The same had been incorporated from the Trade Practices Act 1974, which prohibits price discrimination on the below mentioned grounds.
Price discrimination can be anti-competitive. The law prohibits an organisation to price discrimination between buyers on the basis of the charged price, discounts/ rebates/ credits, complimentary services and the payment mode. Discrimination on these grounds portrays the market to the new sellers as less profitable and reduces the level of competition.
Price discrimination is valid in cases when the discount/ rebates/ credits are reasonable and the one provided in good faith to stay in the competition. This can encourage the new sellers to enter the market.
Law of Demand and its exceptions:
Law of demand establishes a negative relationship between the price and quantity demanded of a commodity. It is valid for almost all the commodities. There are certain commodities which repels the law of demand. These could be necessities, giffin goods, goods of distinction or the goods which are expected to become expensive. The demand curves of these goods are positively sloped. Their demanded quantity increases with the increase in price.
Veblen and other prestigious goods:
Gold, real estate and financial assets are the goods which are bought on the basis of speculations. Their demand is influenced by the price expectation. If the price is expected to increase in the future, people buy more of the commodity even when the current prices are high. Veblen goods are the luxury or prestige goods which have positive relationship between the price and quantity demanded. They are exception to the law of demand and include commodities like gold, diamonds, paintings and expensive carpets. People associate these goods with high status. The higher their price and quality, the higher is the demand for these commodities. Real estate and financial assets are traded on high speculations. People purchase them with the expectation of increase in price even if the prevailing prices are high. Real estate has high demand because of its necessity nature also.
Exception goods in case of high expectations:
Commodities like these have upwards sloping demand curve. If the prices are expected to increase in the future, people will buy more of the commodity. This is done to gain from the future increased prices. The demand curve will shift rightwards in case of high expectations and vice versa.
Uncertainties:
People form expectations about the future price change. People make expectations based on the past and present scenario and develop expectations. If they expect the prices to rise in future, they increase their current consumption. If they expect the future prices to fall, they will decrease their consumption in the present.
Future is uncertain people make present consumption decisions based on their future expectations of prices. People change their consumption based on the current scenario. If the present prices rise, people expect the future prices to also rise. Hence, they increase their current consumption and contrariwise. There are two types of expectations that people can make.
Rational expectations: People make expectations about the future scenario and make choices in the present. These expectations are based on the rational thinking along with the past analysis. People make use of the information available to them along with the past experiences. They acquire understanding from the past experiences. Rational expectations on an average are more reliable to make future trends. People are more forward-looking. The expectations of the future influence the current consumption. Often this leads to changes in the consumption of a large population and eventually the future deviates from the expectations.
References
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