Prices

To understand the coordination effect of prices, we consider the following game. It is known as “El Farol”. El Farol is a popular bar. Every Thursday, people go there to have a few drinks. But since the bar is relativly small, it becomes quickly overcrowded.

1. If at least 40% of all possible guests stay at home, and 60% go to the bar, those being in the bar have a great night.
2. If less than 40% of all potential guests stay at home, and more than 60% go to the bar, they waste their time and would have a better night at home.

Let’s assume that admission to the bar is free. Introducing a price reduces the number of potential guests. If the price is set right, exactly 40% of the potential guests stay at home, and 60% go to the bar.