Price comparison services on the Internet (as well as \"shopbots\") are a popula

Question

Price comparison services on the Internet (as well as "shopbots") are a popular way for retailers to advertise their products and a convenient way for consumers to simultaneously obtain price quotes from several firms selling an identical product. Suppose that you are the manager of Digital Camera, Inc., a firm that specialized in selling digital cameras to consumers that advertises with an Internet price comparison service. In the market for one particular high-end camera, you have only one rival firm - The Camera Shop- with whom you competed for the last four years by setting prices day after day. Being savvy entrepreneurs, the ease of suing the Internet to monitor rival firms prices has enabled you and your rival to charge extremely high prices for this particular camera. In a recent newspaper article, you read that The Camera Shop has exhausted its venture capital and that no new investors are willing to sink money into the company. As a result, The Camera Shop will discontinue its operations next month. Will this information alter your pricing decisions today? Explain.

Explanation / Answer

Yes this will. In this case, if our only rival firm leaves the market, we will take his market share and become a monopoly. With this, our firm will enjoy monopoly profits in the short run. In other words, these will be economic profits. This however, sends a signal to the market and in the long run, new firms will enter the market. To better answer our question, we will want to increase our price to the point where MR=P. and produce only the quantity at this point. This will result in the largest total revenue. Hope this helps

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