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Consider The Amount Of Price Variation That You Have Found. Discuss Possible Explanations And Include Those Relating To "Tourist Trap" Or Other Models Based On Imperfect Consumer Information.

1806 words - 7 pages

Consumer always face the problems of not knowing which stores sell a good at the lowest price and how quality varies across brands. They know that price do vary on a same product across brands, but they do know not what that price difference represents, for the better qualities that product possess? But are these better qualites worth paying that extra difference in price? If consumers are provided by perfect information about product prices, attributes or quality, their buying behaviour can be altered and thereby affects market structure. In relation to simple economics market structure theory, perfect competition is a market structure in which both the supplier and consumer have perfect information about the product, consumers therefore have to power to choose the cheapest product. Firms are then forced to lower their price to an optimal level in order to compete and profits are also reduced to a minimum as a result. However, in real life, the existence of a perfect competition seems impossible and only limited information is available to consumers. Hence, firms may have the incentives to reduce consumers' information in order for them to gain abnormal profits.Digital cameras have become the new chapter in the photography industry. Not only they carry the same functions of a normal camera, i.e., taking pictures, no film and development is needed, special effects can be added, short movies can be videoed, and best of all, pictures can be duplicated and passed on at just a click of a button. The only disadvantage they possess is that they cost a lot more than a normal camera and not everyone can afford one. But no doubt the market is growing, and it's not a surprise leading firms in this particular industry are investing heavily on new better designs, trying to capture as much market share as possible. Here is a list of the top brands and their "best" quality products:Source from http://www.pricerunner.com 05/03/2003One simple analysis that can be immediately drawn from the list above is that a higher quality product does necessarily impose a higher price. Take the example of the Sony Cyber Shot and the Olympus C-50 Zoom, the latter one has a resolution of 5.4Megapixels as oppose to the 3.34Megapixels possessed by the Sony camera. However, Sony is priced at $450, top of the list, and Olympus costs $440. An even biased example is the Minolta Dimage F300, which has a resolution of up to 5.0Megapixel and only costs $420, $30 lower than the Sony Cyber Shot. So what is the reason behind this phenomenon? Why would Sony price its relative lower quality product above those with higher qualities? And as a more general question - why does price variation exist? Are consumers aware of these variations? Economists have revealed that the reasons behind these questions all arose from imperfect information, or limited information, about both the price and quality of a product.*Limited information exist because i) information varies in reliability, and not all...

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