Question

Suppose two artists are selling paintings for the same price in adjacent booths at an art fair. By the end of the day, one artist has nearly sold out of her paintings while the other artist has sold nothing. Which characteristic of competitive markets has not been met and best explains this outcome? [LO 3.1] a. Standardized good. b. Full information. c. No transaction costs. d. Participants are price takers.

Short answer

Full information is lacking.

Step-by-step solution

Understand the Scenario

At an art fair, two artists are selling paintings at equal prices in adjacent booths, but only one artist has sold most of her paintings, while the other hasn't sold any. We need to figure out which market characteristic has been unmet, leading to this situation.

Review the Characteristics of Competitive Markets

Competitive markets are supposed to have standardized goods, full information, no transaction costs, and participants are price takers. Evaluate each characteristic to see which might explain the disparity in sales.

Analyze Standardized Goods

Standardized goods mean products are identical in all aspects. A lack of standardized goods would be reflected by differences in product quality or features, which can lead to differences in sales. However, the exercise doesn't hint at any quality difference between the paintings.

Analyze Full Information

Full information implies that both the buyers and sellers have complete knowledge about the products. If the buyers don't have full information, such as a lack of knowledge about one artist's work, it could explain why one artist sold more despite the same prices.

Analyze No Transaction Costs

No transaction costs mean that there are no barriers (like fees or additional costs) to buying the product. Since the booths are adjacent, it’s unlikely that transaction costs are a factor.

Analyze Price-Taker Participants

Price-taker implies both sellers and buyers accept the market price without influencing it. Since the prices are the same, this condition seems to be met.

Conclusion Based on Analysis

Given all options, the lack of full information most plausibly explains why only one artist sold their paintings. It suggests that buyers were not fully informed about both artists' works, prompting unequal sales despite equal prices.

Key concepts

Standardized Goods

In a competitive market, standardized goods refer to products that are identical in all aspects. This ensures that consumers view every unit of the product as interchangeable, regardless of the seller. Whether you're buying wheat or smartphones, if they are considered standardized, one unit is the same as another.
Here are some key points about standardized goods:

• They have consistent quality.
• There are no visible or functional differences between products from different sellers.
• This consistency helps facilitate stronger competition since sellers cannot compete based on product differences.

In the context of the art fair in our exercise, the standardized goods concept was likely not the main factor for differing sales, as there was no specific indication that the paintings had noticeable quality differences.

Full Information

Full information is a critical characteristic of a competitive market. It implies that all participants in the market, both buyers and sellers, have complete and transparent knowledge about the products and prices available. Information symmetry supports fair competition, as consumers can make informed decisions based on correct data.
Consider how full information impacts a market:

• Consumers are aware of all options, ensuring they select the best product for their needs.
• Misleading advertising or product information is reduced.
• Price and product comparisons are easier for consumers.

In our art fair scenario, the likely unfulfilled characteristic is full information. Customers might have had more knowledge about one artist's reputation or prior work, leading to uneven sales, despite equal pricing.

Transaction Costs

Transaction costs include any additional expenses incurred during the buying and selling process. In a perfectly competitive market, these costs are ideally nonexistent, allowing free and effortless transactions.
Components of transaction costs might include:

• Search and information costs.
• Bargaining and decision costs.
• Policy compliance or shipping fees.

Low or no transaction costs mean that buyers can purchase goods without worrying about extra charges or hidden fees, removing barriers to entry and promoting market fluidity.
At the art fair, the proximity of booths means transaction costs were unlikely to affect the sale outcomes substantially, as the buyers faced no additional costs from one booth to another.

Price Takers

In a competitive market, being a price taker means both sellers and buyers accept and follow the market-established prices without trying to influence them. No single buyer or seller has enough clout to change prices of their own accord.
Some properties of price takers include:

• Prices are determined by the intersection of market supply and demand.
• Individual sellers can't raise their prices without losing customers.
• Buyers cannot demand lower prices without going elsewhere.

During the art fair, both artists exhibited characteristics of price takers as they sold their paintings at the same price. Hence, this characteristic of competitive markets wasn’t improperly met, reaffirming that the disparity arose from another factor, such as information availability.