3 ms·

5. Since the strategy was so effective before, other competitors come in and do the same thing. 6. Now whenever there is an overpriced restaurant, I get delici

5. Since the strategy was so effective before, other competitors come in and do the same thing. 6. Now whenever there is an overpriced restaurant, I get delicious, below-cost food from the upstart food trucks. ---- OR --- 5. A new competitor, seeing the overpriced food, sees a profit opportunity and tries to execute the same strategy. 6. The same business from step (1), again does me a favor by providing me delicious food below my expected price. What is so special about your hypothetical rich person that they become immune to competition or threat of competition upon reaching step 4? An economy is a complex dynamic system. More importantly, it is continuous. We can certainly analyze fixed time periods and draw conclusions from these, but any conclusion must be drawn in the full understanding that there is a before and an after. TL;DR Competition doesn't go away because one person did it well, once. Threat of competition can be as effective as actual competition.

abdullahkhalids 8y ago
The purpose of the example was to illustrate was that in the long term equilibrium, the only food options will be food trucks, cheap+bad restaurants and expensive restaurants. Medium price/quality restaurants die out. Also, food trucks usually only run during the day, leaving residents with the option of either cheap+bad restaurants or expensive restaurants in the evening. That is pretty bad situation that should be avoided.
- lozaning 8y ago
  >Medium price/quality restaurants die out. People's preferences are not wrong! If people no longer want to give patronage to any kind of establishment that establishment is not entitled to continued business. Under what circumstances should a restaurant go out of business if not these in your opinion? The long term equilibrium will be that places to eat that attract people's business will continue to flourish.
- greggyb 8y ago
  The purpose of my reply is to explain how there can be equilibrium and competition even in the face of a seeming monopoly. The critical thing is that threat of competition is as effective as competition when there are low barriers to entry. "Undercut and then raise prices" is not a terribly creative strategy - no offense, but you are not the first to come up with it, nor will you be the last. Since it is an obvious strategy, it is always a hanging threat to any restaurant or food truck proprietor. Artificially high prices are not a stable long term equilibrium. If you are so certain that there is a neglected middle in the restaurant market, then open a restaurant and serve medium-quality food at prices a bit higher than medium-quality prices. It seems to me that if the world you posit that we live in exists, that there should be huge profit opportunity in such a market. Anecdotally, in my travels everywhere I have been has multiple food options. This spans from small towns of a few thousand to large cities. These options tend to span a price range that is reasonable based on income demographics of the locations they are in.

abdullahkhalids 8y ago

The purpose of the example was to illustrate was that in the long term equilibrium, the only food options will be food trucks, cheap+bad restaurants and expensive restaurants. Medium price/quality restaurants die out. Also, food trucks usually only run during the day, leaving residents with the option of either cheap+bad restaurants or expensive restaurants in the evening. That is pretty bad situation that should be avoided.

lozaning 8y ago
>Medium price/quality restaurants die out. People's preferences are not wrong! If people no longer want to give patronage to any kind of establishment that establishment is not entitled to continued business. Under what circumstances should a restaurant go out of business if not these in your opinion? The long term equilibrium will be that places to eat that attract people's business will continue to flourish.
greggyb 8y ago
The purpose of my reply is to explain how there can be equilibrium and competition even in the face of a seeming monopoly. The critical thing is that threat of competition is as effective as competition when there are low barriers to entry. "Undercut and then raise prices" is not a terribly creative strategy - no offense, but you are not the first to come up with it, nor will you be the last. Since it is an obvious strategy, it is always a hanging threat to any restaurant or food truck proprietor. Artificially high prices are not a stable long term equilibrium. If you are so certain that there is a neglected middle in the restaurant market, then open a restaurant and serve medium-quality food at prices a bit higher than medium-quality prices. It seems to me that if the world you posit that we live in exists, that there should be huge profit opportunity in such a market. Anecdotally, in my travels everywhere I have been has multiple food options. This spans from small towns of a few thousand to large cities. These options tend to span a price range that is reasonable based on income demographics of the locations they are in.