Friday, April 18, 2014

Black Friday and the Prisoner's Dilemma

Bloomberg BusinessWeek explains that "Black Friday", the day after Thanksgiving to start the Christmas shopping spree, is an example of the Prisoner's Dilemma.  Here's how:  collectively retailer's are more profitable by not lowering prices if all retailers do not lower prices; but individually each retailer makes higher profits by their lowering prices if their competitors do not lower prices.  Since each is better off by lowering their prices, they all lower prices but earn lower profits than by all not lowering prices.

Wednesday, April 16, 2014

Product Differentiation & Craft Beer

The New York Times has a good article on how one craft beer producer is restricting output as their business model.  Craft beer is a niche beer market that survives on product differentiation, which as you read the article linked above you will find that Hill Farmstead Brewery has in abundance.  Thus, the decision to only sell locally will reduce the ability to make more profits, but continue to keep the perceived value of the product high.  This trade off between high quality and high output is a classic component of a firm in a monopolistically competitive market.  To be profitable the firm's output has to be very different (typically produce something that customers value different from others) or the firm has to produce enough of the product to make it slim margins on the product.

Tuesday, April 15, 2014