Friday, March 02, 2007

Some economics...

Pricing, Game Theory, Dew Drops, Ravichander Rao

Yesterday night my friend bugged me with this question: "In an open market, there are some sellers who have in total 50 books and there some buyers, who have in total $50, that they can spend. What will be the optimal selling price for a book in this market?"

Initially I was taken a back, but later started negotiating my answers with him. According to me, the most optimal selling price is - the maximum price a buyer with the least amount on hand can spend for the book...Obviously, a bit irritated with my circumlocution, he offered me the answer as - "the optimal selling price is $1 for the book, as this would lead to maximum number of books being sold and maximum number of transactions happening...".

Today I offered him a counter question, "What is the actual value of $1? ie. What is the maximum money you will put in to get $1 from me?" His answer was 99 cents. My take on this problem is - the value of $1 is situation based. If it is an auction and it is a $1 that is still in circulation, its value is at the most $1.01, the extra 1 cent for prestige value during an auction. Similarly, the value of $1 could be $1.25, if you do not have sufficient change for a bus ride.

So, my counter argument to the yesterday night's problem is that - there is nothing like optimal selling price. The pricing is governed by the conditions prevailing at that time and price a buyer can offer is dependent on his needs. If this is what the case is, how do people put into practice theories like Game Theory?


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