Quiz 10: Price-Searcher Markets With Low Entry Barriers

Business

Price searchers being the price setters do not mean that they can set the highest possible prices. Price-searcher market is characterized by intense competition and close substitutes; therefore, if a price searcher sets the highest possible price, then it will drive away the consumers to other competitors. The price at which the marginal revenue is equal to the marginal cost of production will maximize the price searchers profit. At the profit-maximum output, the marginal cost of production will be less than the price. It is because at the profit-maximum output, the marginal cost is equal to marginal revenue and marginal revenue is always less than the price where the demand curve is downward sloping.

No. Prices in a price-searcher market are affected by market conditions depending upon the nature of the demand, level of competition and barriers to entry, extent of innovation, and etc. In price searcher markets with low barrier to entry, in the long-run firms will not be able to earn economic profits because the excess profit in the short run will lead to entry of new competitors in the market. As a result, the share of the demand of the existing firms will decline and compete away the profits. Eventually, in the end in the long run each firm will be earning zero economic profit, that is, each firm will be producing at the level where the price is just equal to the long-run average total cost. Competitive price searchers will have to make attempts to differentiate products in the eye of the consumers by changing the design, shape, or size of the product. Besides they have also to incur the advertising cost with the objective to alter the consumer demand in their favor and earn economic profit.

The extent of variety in a product is determined by the consumer and his/her willingness to pay for variety in a product, given the cost of providing it. A consumer highly values a product and its variety if the cost of producing different variety of the product is low. As a result, there will be a lot of variety in the product. Therefore, there is a lot of variety of napkins in the market as compared to toothpicks.

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