Price Undercutting

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    Dr. Herbener,

    I’m up to the two lectures on Price of Consumer Goods, and I’m wondering how this relates to the home-based business I’m currently in. I have been selling used books on Amazon for nearly three years. Over that period, I and other like-minded sellers who are interested in maximizing profits have noticed the ever-increasing trend toward the “race to the bottom” as it’s referred to, i.e. the continual undercutting of a book’s price until it is being sold at barely a break-even point or even at a substantial loss, after factoring in Amazon’s fees, shipping cost, and cost of goods. I’ve listed many books for sale that had an initial low price of, say, $65, with maybe four or five sellers having listings at this price or above; but, by the time the book sold a few months down the line, the price had been driven down to nine or ten dollars by other sellers coming on board and continually back-and-forth undercutting each other until the book’s value is completely destroyed. Some of us refer to this as “desperation selling,” but I’m wondering if Austrian Economics has any labels for and theories about why this type of activity occurs. I get very frustrated, as it appears to me that many of these sellers wake up every morning asking themselves, “What can I do today to make sure I make the least amount of profit possible on the sale of my books?” Thank you.


    Economic theory deals with universal principles. Regarding the competition among entrepreneurs, economic theory says that an entrepreneur anticipates a profit when making an investment in resources used to produce the output and sell it to customers. If entrepreneurs in a particular line are earning profit, then other entrepreneurs will invest in the profit earning line and push down selling prices of outputs and push up buying prices of inputs. This competitive pressure continues until no profit is anticipated in further expansion of output. At that point, entrepreneurs will earn merely an interest return on their investments.

    Entrepreneurs can also compete by attempting to lower their cost structures (say, by innovation or more efficient combinations of inputs) or raise their revenue structures (say, by marketing or differentiating their products). Entrepreneurs with a lower cost structure can successfully undercut entrepreneurs with higher cost structures.

    Finally, since entrepreneurs invest in resources only with an anticipation of earning profit by selling their output in the future, they may be surprised by the unanticipated competitive pressure placed on them when they try to sell.

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