Showing posts with label driving economics. Show all posts
Showing posts with label driving economics. Show all posts

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!