How does an entrepreneur set prices?

Traditional (neo-classical) economic theory has robust models of price-setting in two extremes. In a perfect market, identical firms sell identical goods at the same price, each firm covering its marginal costs, but no firm making any profit.

But where do normal firms and entrepreneurs set their prices, based on imperfect information regarding their competition, the potential clients, and the “unique” elements of their goods/services?

Here’s a picture:

My one-handed conclusion is that economists are very sure about a very rare set of market circumstances and very unsure (or they should be!) about 99% of market participants.

Hey! Thanks for visiting my blog

Sign up to receive new posts when they are published (twice per week).

We don’t spam! Read our privacy policy for more info.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

Leave a Reply

Your email address will not be published. Required fields are marked *