> But this is the puzzle for neoclassical economics. If
> you don't drop your price when costs fall, why don't I
> drop mine to sell more quantity? And then you must
> drop yours to compete. That's what the model predicts.
>
> jks
I'll give it another try at imagining myself as having a company :)
My gut response is-- why sell for less when you can sell for more?? Why would the other guy sell for less when he can sell for more??
Well, if I am making selling well right now why should I risk dropping my price at all as long as the competition isn't dropping theirs? I would not look that great on the stock market if my actual profits dropped. I don't think that would be very pretty, as I would have the concern of losing investment. And why would they drop theirs at all, unless I drop mine? In fact isn't it more of a problem that competitors agree on prices?
Also, there is a narrow window in which one can sell and make a profit! If you go too high, then you lose sales but if you go too low then your profits are effected as well - you sell more but what you get out of each item is less.
It's a bit of a puzzle to me that one would imagine that these people would do rather illogical things that would actually decrease their earnings. I know it has happened at times that there has been some nasty competition directed at driving the competition under, but from what I understand that isn't based on decreased cost-- its just based on being ABLE to hold out long enough to drive the other under then buy it up.
Then again some people will never ever go with Windows even if it was free.