Monopolists and Oligopolists are often accused of price gouging. Price gouging o
ID: 1110076 • Letter: M
Question
Monopolists and Oligopolists are often accused of price gouging. Price gouging occurs when prices are measureable higher than what would be expected during normal economic times. However, the perception of price gouging, apart from collusion, can be explained by basic supply/demand analysis.
Q: Show and explain two ways in which unusually high prices can be explained by market forces. in addition, show and explain how collusion can create a situation in which price gouging can occur.
Having trouble knowing how to even start answering this question. Thanks in advance for any help!
Explanation / Answer
The argument in favor of allowing price gouging is that the prices help to make sure goods go where they are most valued. If someone is ready to pay more then the actual cost of the product,that means that he needs it most.
1. Stocking up goods for emergencies: If there is a possibility of a natural disater the owner of a general store will stock up the items so that he can sell them on more profit later. It is good because the people will atleast get goods at the time of disaster.
2. Encourages conservation: Letting prices rise will also encourage conservation among the users, so that any given supply of items is “rationed” among people more uniformly.
When two oligopolist firm colludes it affects the market as a whole.The individual firms in an oligopoly are interdependent of one another with regards to business decisions, like, price of the product, service, location, advertising etc. The actions of one firm will impact heavily the profitability of the other. This sometime gives rise to price gouging.