Comments on: Pricing http://pnarula.com/200510/pricing/ Intense activity - in the midst of eternal calmness Thu, 28 Aug 2008 00:40:41 +0000 http://wordpress.org/?v=2.5 By: Nilesh http://pnarula.com/200510/pricing/#comment-3283 Nilesh Sat, 29 Oct 2005 16:55:41 +0000 http://www.pnarula.com/archives/2005/10/22/pricing/#comment-3283 The statement above is partly incomplete - I think that in part explains your confusion. The real rule in economics is - given perfect competition, price tends to equal marginal cost. Now as you can imagine, perfect competition is an almost utopian state, almost only achieved in electronic exchanges like Chicago's mercantile exchange for commodities. I mean with oil - most people don't care whether your oil comes from Kuwait or the North Sea - hence you almost have perfect competition. Perfect competition doesn't exist in healthcare, or in software, or in those cotton t-shirts from Gap, because you pay a premium for wearing the Gap logo. If 20 competitors were all able to offer you the Gap logo (think a market in Sarojini Nagar), then price would actually equal marginal cost. The statement above is partly incomplete - I think that in part explains your confusion.
The real rule in economics is - given perfect competition, price tends to equal marginal cost.

Now as you can imagine, perfect competition is an almost utopian state, almost only achieved in electronic exchanges like Chicago’s mercantile exchange for commodities.
I mean with oil - most people don’t care whether your oil comes from Kuwait or the North Sea - hence you almost have perfect competition. Perfect competition doesn’t exist in healthcare, or in software, or in those cotton t-shirts from Gap, because you pay a premium for wearing the Gap logo. If 20 competitors were all able to offer you the Gap logo (think a market in Sarojini Nagar), then price would actually equal marginal cost.

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