Prices
Last Updated on 28. April 2023 by Martin Schuster
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.
- 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.
- 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.
