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?
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?
