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Market Clearing Prices

Modern day businesses effectively control market prices according to current supply and demand, which allows them to maximize profits in many different situations.  This article discusses the problems involved with surging prices, and how many industries actually avoid this strategy.   For instance, after natural disasters many are in need of basic necessities and materials to rebuild.  Companies that offer these supplies could surge prices in order to gain profits off of those in need.  Another example arises in energy distribution, as power plants may attempt to raise prices in certain seasons or time of the day so  they can counter the costs needed to keep these plants running.  However, as discussed in the article, it is actually ineffective for companies to simply raise prices to keep up with demand.  This logic is seen not only in Richard Thaler’s Nobel-winning work, but also in numerous industries.  In many performances and concerts, tickets may actually be purposely under priced to the market. Some economists argue that although this seems to throw away profit, it is actually beneficial for ticket selling as well as a long term relationship between fans and musicians.  This problem of surging prices is also present in the taxi service provided by Uber, as they drastically raise prices for a car ride in conditions such as poor weather.  After complaints by customers, Uber also trended away from surging prices and started providing cost estimates of rides.

As covered in class, we see that the concept of market clearing prices and matching play a large role in how products are distributed to consumers.  However, we also see that these strategies prove to be the result of the most “ideal” situations and may actually prove to be inefficient.  Following the strict theory of market clearing prices may instead result in moral outrage in consumers and a lack of fairness that consumers are looking for.  In the case of Uber, they raise prices of a car ride when their service is in high demand, thus matching to only those who can afford the service.  As mentioned in the article, this is where basic economic theory does not provide the best solution for most companies.  It may actually be beneficial to act “irrationally” and avoid a continuous surge of prices until only some can afford these products.  Thus, the concept of market clearing prices discussed in class provides a solid foundation for what may be expected in the market, but in reality this article provides novel insight into real business practices.


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