Properly anticipated price is the price fixed after studying the competitors and market situation. It is required to change according to the market situation and competitive environment. Prices are changed according to the available information in the market. Prices are randomly selected according to the fluctuations in the market. Information in the market is very much efficient and is readily available to all players in the market.
Superior information, financial innovation, and superior technology are essential for attaining competitive advantage. The more efficient the market means more price changes will be generated. Prices changes are completely random and unpredictable. This is occurred due to the profit motive from the information gained. Price in the market is reflects all available information and should be consistent with existing trends. Price changes are not predictable in a market and so pricing decisions are made from the available information.
According to Samuelson, Prices follow a random walk. It means that prices are changed in random series. From this case, inefficiency in pricing is detected by the duration dependence in prices changes. Uncertainty is playing its role in random changes in prices and random changes of prices.
“Unlike the many applications of the Random Walk Hypothesis in the natural and physical sciences in which randomness is assumed almost by default, because of the absence of any natural alternatives, Samuelson argues that randomness is achieved through the active participation of many investors seeking greater wealth.” (Andrew & MacKinlay 1999).
Security markets are considered as efficient market for the reason that the information availability is the basic factor that determining the prices in these markets. All the trading in security market is related to the available information in the market. In an efficient market the opportunity for generating excess profit is limited. Hence the investors are reacting with the information in time. Due to this the price movements usually do not exhibit any specific direction. Thus accurate anticipation on price movements is not possible from data on past price movements.
The main reason of the random walk movement in properly anticipated prices is the specific nature of efficient market. The price changes in an efficient market which are anticipated properly is un- forecast able. It is resulted from the expectations of future market conditions as well as from the availability of information regarding the changing market conditions. According to Fama this specific random walk fluctuations in anticipated prices is due to the fact that in an efficient market the prices will fluctuate with the spreading information in the market.
Demand and supply
Demand analysis is of great significance to management. The intensity of demand itself is reflected in terms of price paid. Demand for a commodity is the necessary step towards consumption of that commodity. The process of consumption indicates satisfaction level of consumers. If the demand for an organization’s product is declining, then the organization may need to undertake some sales promotions and if the demand exceeds supply then the organization may be required to reverse its production plan. Thus the larger the demand for an organizations product the higher is the price that the organization can charge.
The concept of elasticity of demand should measure the responsiveness of demand for a commodity to changes in the variables confined to its demand function. Price elasticity of demand refers to the responsiveness of demand to changes in price. At very high range of prices the demand is generally less elastic because the demand comes from rich people. In the same way the demand for commodity will be less elastic if it is being sold at a very low price because all those who want to buy that commodity have done so and further fall in price does not increase the demand. Therefore the demand at very high and very low price is inelastic.
When the price of the goods has fallen and the buyers expect it to fall further then they will postpone buying the goods and this will make demand less responsive. If they expect price to go up then they will speed up the purchase and this will lead to increase the elasticity.
The active participating investors in the market are always seeking greater profit. So in order to exploit every possible opportunity available from information. For this they take the information in order to fluctuate the market prices and thus the profit opportunity is exploited at the simplest possible time. The after effect of this movement is that there is no further profit opportunity in the market. This is a controversial feature in efficient market. The intensity of randomness in price fluctuation is directly related to the information efficiency market. Thus in the most efficient market the price changes will be more random and uncertain in nature.
Modern financial economics suggests that there is always some limits on anticipation in future price fluctuations. Thus the expected return from the market is always affects this limit. (Andrew & MacKinlay 1999).
Prices of financial assets are influenced by the information factor. In an efficient market opportunity to create huge profit from investment is not available. Samuelson explains the randomness in anticipated price movement through the theory that competitive markets are controlled by the demand and supply. There is always equilibrium in demand and supply. Due to this the upward trend in security price will be anticipated before its occurrence. Because of the influence of the competitive forces in the market the price changes will be relates to their actions.
Conclusion
The positive inspirations to active investors in the market resulting from the information will be the main factor of market fluctuations. Modern finance is characterized by the trade off between risk and expected return. Thus anticipated price of security is always based on this risk and return factors. Then the changes in such risk and return factor will reflect on the anticipated prices. Thus it can establish that uncertainty existing in the efficient market is the basic factor that leads to the randomness movement in properly anticipated prices.
Bibliography
ANDREW., & MACKINLAY, Craig. (1999). A non random walk down wall street: Introduction. Princeton University Press. Web.