Economics of Driving

You know the feeling when you are stuck in the traffic for hours, just staying on the lane and waiting to move… I love economics, and I read books which relate everyday events to economics, so I figured I can give it a shot… The lanes on road remind me of industry competition economics…

Assume there are 2 firms A and B operating in the economy… If there is price competition and firm A reduces price by a fraction in order to gain market share, it will get more customers and firm A’s profits will increase.. firm B will then reduce its price to firm A’s level and the lower price advantage enjoyed by A is lost… Both firms wont enjoy the incremental profits… They will keep undercutting price till it sells at cost and no profits….

Think about lanes in a freeway… You are on lane 2, you think lane 1 is faster, so do others… You all end up on lane 1… And suddenly the advantage disappears, lane 2 seems faster… For most of the ride, you keep moving between lanes without any real advantage!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s