The phenomenon of “happy hour” pricing (________ prices when demand is relatively high) results from relatively ________  (elastic/inelastic) demand.

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Application 3 HAPPY HOUR PRICING APPLYING THE CONCEPTS #3: How does monopolistic competition compare to perfect competition? Happy hour L-ark Bieres 50 et Cocktails Saako 6 Cocktails 6 by d Consider the phenomenon of "happy hour." Many bars and res- taurants near workplaces face an increase in demand for food and drink around 5:00 P.M., and many cut their prices for an hour or two. According to the model of perfect competition, an increase in demand will lead to higher, not lower prices. What explains the happy-hour combination of higher demand and lower prices? Bars are subject to monopolistic competition. Each bar has a local monopoly within its neighborhood, but faces competi- tion from other bars outside its neighborhood. For an individual consumer, the higher the demand for food and drink, the greater the incentive to consider alternatives to the nearest bar. If you expect to purchase large quantities of bar food and drink, the savings achieved by finding a lower price at an alternative bar will be relatively large. In other words, when individual demand increases, each bar faces a more elastic demand for its prod- ucts. In a market subject to monopolistic competition, the bar's rational response to more elastic demand (more sensitive con- sumers) is to decrease its price. In graphical terms, the demand curve facing each bar becomes flatter, and the demand curve will be tangent to the average-cost curve at a larger quantity and a lower price and average cost. Related to Exercise 3.6. SOURCE: Based on Mark Fisher, "Happy Hour Economics, or How an Increase in Demand Can Produce a Decrease in Price," Economic Review, Federal Reserve Bank of Atlanta (Second Quarter 2005), pp. 25-34.