Friday, September 25, 2009

Free market (3) - A fair price

A free market is supposed to increase efficiency and to bring down the cost of products through competition. It requires the price to be fairly determined, so as to benefit the buyers and also make a profit for the seller.

To following conditions are necessary to get a fair price:
a) the product is standard
b) the quality can be measured
c) all parties have information about the market prices of these products

The price may differ according to the difference in cost. For example, an expensive shop can charge a higher price for a product, due to higher rent and greater convenience to the buyer. The buyer has the choice of paying more for the convenience and ambience.

The convenience store, which is opened 24 hours a day, has to charge a higher price compared to the supermarket for the same product. Customers are willing to pay the higher price charged at the convenience store.

It is possible for the seller to charge an inflated price, that is unfair to the buyer, under the following situations:
a) the buyer does not get the relevant information about the product
b) the seller gives misleading information about the product
c) the seller applies pressure selling methods

If the seller "cheats" the customer, the seller will get a bad reputation and will not get future business from the customer. However, there are many other customers that the seller can "cheat" and the seller finds that it is more profitable to "cheat" customers, unless these are treated as criminal offences. If it is quite common for people to "cheat" other people under the guise of "buyer beware", the society will become dishonest and people will learn to distrust other people.

It is better to encourage a society that is more honest and ethical.

Tan Kin Lian

1 comment:

  1. The insurance industry is an imperfect market, a bane to consumers and boon to agents and the companies.
    Consumers don't have complete information and all info comes from the agents. The agents can twist,manipulate and give half ,half lies because of this imperfection.In economic term this is arbitraging.
    In an efficient market all info flows freely and timely, the insurance agents have no chance of exploiting the anomalies because there is no anomaly in the first place.
    FISCA may serve as the info dissemination agent
    to 'perfect' the market, although not easy.

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