Thursday, April 15, 2010

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!

1 comment:

Shreenath Regunathan said...

I love your post sis! such a truism of selection of lanes... I wonder if there is a dictum or paper on game theory of switching lanes!