Read the following case carefully and answer the questions that follow:
Clearing market refers to such market in which there is neither the situation of excess nor the situation of surplus. It is a state where market demand is equal to market supply. Unlike to that of clearing market, a non-clearing market arises when economic agents react to both price signals and quantity signals. In particular, economic agents sometimes deliberately create a disequilibrium situation in order to extract benefits from the persistence of a surplus or a shortage of the commodity or service that they sell or buy. One of the main insights of non-clearing markets theory is that disequilibrium in one market can create desirable spillover effects in a related market.
For example, ticket prices for music concerts by superstars, such as Rajesh Payal Rai or Prakash Saput, are often deliberately set below the equilibrium price to create a shortage (i.e. excess demand) for tickets. Long lines form in front of ticket booths long before tickets go on sale, and all available tickets are quickly sold out as soon as they go on sale due to limited seat. The news media report on the long lines to get tickets and interview some of the people camped outside ticket booths days before the tickets go on sale, fans talk about the hot concert coming up, and an aura of anticipation and success is created. Promoters play this price game in the expectation that all the "hype" about the concert and the free publicity that it gets will lead to much greater sales of the star's recordings, and that these spillovers will more than make up for the loss of revenue by pricing concert tickets below the equilibrium level.
The same occurs in pricing popular MOMO HUB or PIZZA HUTS. Lines in front of the new restaurant and 'word of mouth' are the best and cheapest forms of advertising that the restaurant could have. Despite the limited space to welcome all customers, people believe that it is difficult to get into the restaurant due to high goodwill. As a result, such restaurant owners can offer high prices to deliver at home to grab more profit.
Questions:
a. Identify the factors that cause disequilibrium in a market economy. What are the economic implications of market disequilibrium?
b. Why do firms motivate to fix the price at below equilibrium price? Explain.
c. What will be the effect of this type of pricing strategy in consumers' welfare?
d. What suggestions would you provide the government to regulate the firms in restricting illegal pricing practices?
