Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

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. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, July 20, 2005

Harry Potter and the Invisible Hand

Numerous bookstores have been discounting the latest Harry Potter book by up to 30% and more. As Brian Ferguson notes, this is exactly the effect one would expect from a competitive market with easy entry:

It's at the retail level that the expected profits aren't being made, and that's because the retail market is highly competitive. The market level demand for Potter is undoubtedly highly inelastic, but at a suggested retail price of $40 plus dollars for a kids book, parents, especially young, lower income parents, are going to be very sensitive to price differences. The retailers are competing with each other. Set a price much above what your competitors are charging, and you're going to see your customers streaming into their stores. It's the textbook perfectly elastic demand curve for a perfectly competitive firm in action. The fact that supermarkets are getting in on the game means that the easy entry condition is satisfied, at least when you define the market not as the market for kids books but as the market for Harry Potter and the Half-Blood Prince.
You should read his entire piece for his detailed thoughts and analysis.
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