As for the gouging idea… it’s the most “efficient” in an economic sense, which means that goods and services are shifting around in a way that meets the demand well, which means that everyone that wants one can usually get one. This doesn’t necessarily mean that it’s when they want it or anything like that- it just means that if normal demand in a zip code is say… 100 generators per month at $200 per generator, then when the demand spikes to 500 a month after a disaster, prices will go up until the supply comes in and evens it back out. That’s the indicator that demand is high; without that, there’s no incentive for people to go meet that high demand; why should someone buy a generator for $200 in a non-affected area, then spend their own money and time to go sell it for $200 elsewhere? Altruism is a reason, but it’s not the one that motivates most people. Let that price rise to $1000 per generator, and that same guy will load up as many as his truck can hold and high-tail it to the disaster area as fast as he can get there, hopefully before the other guys do, and the inevitable price drop.
This stuff only works for things that aren’t necessities; the problem comes in with things like water and food, where people may not have enough money on hand after a disaster. In that situation, people need these goods to survive, regardless of whether or not they have money, and as a society, we generally aren’t willing to let people die of dehydration or starvation just because they didn’t have a few bucks for bottled water or canned food.
The question, at least to my way of thinking, is where do we draw the lines as far as what is considered a necessity, and how much does personal responsibility affect the government’s obligation to help you out? I’m personally somewhat conservative on both; there isn’t much beyond adequate food, water, clothing, shelter and medicine that is really necessary for people, and I tend to think that after Hurricane Ike, most of those retards on Bolivar peninsula and on the West end of Galveston deserve what they got if they stayed. (hell, I think they deserved what they got if they built homes there in the first place; did nobody learn from Alicia in 1983?)
OK Ruminator,
I am getting bored with this. You obviously don’t understand what marginal cost means and why it’s not relevant to labor markets and wage setting. And I don’t have the time to explain it since it is admittedly quite a tricky concept especially the distinction between short-run and long-run marginal cost.
Your entire theory of markets seems to be that whatever pricing decisions businesses make is best for consumers and government shouldn’t try to second-guess what businesses do. Why you believe this I don’t know; it’s frankly more akin to theology rather than economics. The real world economy is a lot more complicated than simple slogans about how markets are best and good economics has to adjust to that reality.
A “free market fix” that surprise, surprise amounts to the wealthy employer getting a decision that goes all his way, and the employee getting squat. It’s just another example of how “free market” is generally code for “stomp the common people”.
So you’re not saying that arbitration occasionally, or even often, is unfair - you believe it always is, in every single case ?? No arbitrator has ever handed down a decision upholding the position of an employee over that of an employer?
No consent? Perish the thought! It’s a completely voluntary arrangement. The person has the choice of giving his wallet to me in exchange for not being shot or of getting shot in exchange for not giving me his wallet. The choice is completely his and obviously he consented to whichever choice he made. Just like a freezing person in a natural disaster zone has a choice of whether or not he wants to pay me $5000 for the $500 generator I’m selling. If he doesn’t want to pay me the price I’m asking then he voluntarily chose to continue freezing. No coercion was involved in either transaction.
Please, this is retarded. The mugger has offered a “choice” between 2 items that don’t belong to the mugger. The mugger does not own the victim’s life (which he’s threatening to take away with a gunshot) and he also does not own the victim’s wallet.
How can it be a fair exchange when both items in the exchange don’t even belong to the criminal?
The seller does not own the victim’s life (or his comfort or warmth) but he does own that generator that he’s looking to exchange for $$$.
You have twisted the meaning of “choice” into nonsense and patting yourself on the back because you think you’ve found 2 equivalent scenarios.
Who cares ? He’s asserting that his profit is worth more than someone’s life. Under those circumstances, it would be justified to kill them and take the generator, much less have the government regulate prices.
Reread Little Nemo’s wording. He said the victim didn’t “want” to pay, not that he was “unable” to pay. The victim himself chose the “profit” of keeping his $5000 instead of heating his freezing body.
And even if the wording in the hypothetical was changed to “unable”? Well, that would be a tragedy but I guess that means we have 300 million hypocrites living in the USA. No doubt you’ll contend that you’re an angel who would be excluded from the hypocrites list – I can’t call you on that. However, me and a lot of other people are guilty of letting people die because we didn’t want to give up something in our lives. We just don’t do it face to face with starving African children or orphaned babies with birth defects. No, that situation (as real as it is) would be too detached. We need to create a hypothetical and ratchet the emotions with $5000-a-generator to absolve ourselves of sin — is that how this psychological game works?
Well, then just make the hypothetical $50 billion dollars for the generator or you’ll freeze. Maybe the bigger the number, the better we elevate ourselves to this moral high ground. Now you can say, “I would sacrifice the $50 billion to see my fellow man warmed up with the generator.” Well, good for you. You’re a better man than me. I on the other hand, would at least ask the victim for a payment plan if he couldn’t come up with the $50 billion on the spot. I’m sorry I’m driven by money but I have 3 mouths to feed and I also need new shoes for the baby.
Okay, first of all, I’m not trying to claim that the pricing models the telcos use is necessarily fair - in my first message in this thread I admitted the possibility that they are charging exhorbitant prices because they have monopoly power. I don’t know enough about the specifics of their businesses to make an educated comment on that.
Instead, I’m trying to make a more general case as to why the marginal cost of production may not be relevant.
First, let’s step back and explain for others who may not know exactly what the marginal cost of production is. The marginal cost is the additional cost of making one additional unit of a product. For example, you’ve already invested in your factory, and you produce 1000 units for sale. What does it cost to make the 1001st unit? If you take the total cost of production of 1001 units, and subtract the total cost of production of 1000 units, the result is the marginal cost of production of that extra unit. It’s not necessary linear - the marginal cost of the 1002nd unit may be higher or lower than the marginal cost of the 1001st. It can also be discontinuous - if you have a factory capable of making 1001 units and you make 1000, the marginal cost of the 1001st is miniscule, but the marginal cost of the 1002nd is exorbitant, because you have to build another factory. So the marginal cost may be higher or lower than the average cost, and may rise or fall as additional units are sold.
Do industries generally price their product at the marginal cost of production? Not a chance. The price will often trend towards it due to economies of scale, and sometimes trend towards it as capital expenditures and R&D costs are paid off. In addition, industries get closer to marginal cost pricing as the lifetime fixed costs approach zero compared to overall revenue, and when differences between products do not exist so manufacturers are forced to compete on price alone. That means commodities with low investment costs such as agricultural products, low-cost textiles, etc.
But the high-tech industry is not at all like this. The marginal cost of a Pentium processor is actually quite low - the factories are automated, the raw materials are silicon, plastic, and other cheap materials. And a fast Pentium doesn’t necessarily cost any more to make than a slower one, but may be priced twice as high. This is because R&D costs and the extremely high cost of the fabrication facilities, coupled with the very limited lifespan of the processors in the market, means high unit costs which have nothing to do with the marginal costs of production.
As for SMS messaging, one thing which occurs to me is that the marginal cost is very low because SMS is essentially free riding on a very expensive infrastructure which already exists to service voice and data, which are much more expensive products. So people assume SMS should be close to free, because it doesn’t cost the cell companies much to provide. And this would be true if SMS didn’t eat into the profits of the other services on the network, but it does. Kids don’t phone each other - they text each other. Make SMS nearly free, and they’ll text even more. And then no one will pay the money needed to keep the network going in the first place. So SMS has to be priced in a such a way that overall profitability is maintained, meaning it has to pick up its share of the cost of the entire cell network its free riding on.
And tell me - what’s the marginal cost of a text message, if that message results in the customer not making a $1.00 phone call? How do you calculate it? How should the phone company calculate it?
And therefore the telco’s profits fall. If we assume that profits are already driven down by competition, how should they compensate? By making business calls more expensive, perhaps? By increasing the flat-rate charges per month, which penalizes people who don’t heavily use SMS? Or are you just taking it as a given that cell companies can lower their profits dramatically with no repercussions on the quality and amount of service available? What are your assumptions here?
The cost of bandwidth isn’t the issue. If it was, almost all forms of communication that don’t involve video or bittorrent traffic would be essentially free.
Which brings up another issue - price discrimination. One of the things the telcos would like to do is charge by the kilobyte. If they could do that, then they could price the network efficiently. But they can’t - either because of regulations or because the market won’t stand for it. So they lose the power of price discrimination. Bittorrent users consume tens or hundreds of times more bandwidth than do your average web surfers, and yet they generally pay the same price for their data plans. Attempts to set ceilings on data or overage charges are met with howls of indignation from the same ‘consumer advocates’ who DO want price discrimination when it comes to SMS. The telecom companies lose either way.
Really? So it would be ‘efficient’ if all drug makers sold their new drugs for the marginal cost of producing another bottle of pills? Would any drug makers exist today if that were the standard?
I think you’re taking rules generally applied to mature commodity markets and assuming they apply to all industries. They most certainly don’t. Let me point out that the marginal cost of producing an extra copy of Autocad or Adobe Photoshop is a few pennies. Should Adobe sell Photoshop for a dollar?
Really? Your contention then is that markets in which products are not sold for their marginal cost are not efficient? Again, if you had said that sometimes, in some markets where marginal costs should dominate, the fact that products aren’t sold for the marginal cost plus a small profit may indicate that the market is not perfectly efficient. You really need to add a whole lot of caveats to your statement.
No. The only thing that’s an indication that a regulation may be called for is direct evidence that there is an identified market failure, where the cause of the failure can be determined and a reasonable plan for the correcting the failure, with the result being a more efficient market, can be agreed to. Whether or not a product sells at its marginal cost is usually an irrelevant factor. It may be a data point that’s useful in an overall analysis, but taken by itself it’s meaningless.
Let me give you an example of where it’s meaningless even in a commodity: The price of oil is nowhere near the marginal cost of production. And yet, it’s a well-functioning market with plenty of competition, little information hiding, etc. The reason oil isn’t selling for that price is because the marginal cost of oil is on an upward slope - each additional barrel generally costs more than the previous barrel because exploration and extraction are becoming increasingly expensive. Therefore, oil sold today is less valuable than oil sold a year from now, and the price of oil has to include the discounted price of its future value.
(for this discussion, I’m leaving out the effect of OPEC, which does influence the price of oil when it’s low, but which has little control over it when it’s at high prices anyway).
A much better indicator of whether this is the case would be to look at the overall profitability of the providers. A cursory googling of cell company profitaibility leads to lots of articles like this:
Again, at this point I’m not saying that SMS pricing is correct, or that the market is in fact working correctly. What I’m saying is that the pricing models of the telecoms are complex and evolving, and they are operating in a difficult industry with high capital costs and rapid change, and any assumption about what SMS should be cannot be based on something so simplistic as the marginal cost of the data.
Oh, garbage. We aren’t talking about charity, we are talking about not deliberately massively ratcheting up prices to take advantage of people’s desperation. And I don’t think the typical American is quite as monstrous as you appear to think they are.
The situations are pretty much the same. You can quibble over semantics but it doesn’t matter to the victim if he’s facing getting shot to death or freezing to death. In either case, it’s a farce to pretend that he has a choice of refusing to accept the offer. The seller, whether he’s holding a gun or a generator, isn’t really negotiating a price. He’s saying “How much money do you have? Because I’m going to take all of it and you don’t have a choice in the matter.”
The two situations both come down to “your money or your life”. So don’t pretend that one is somehow moral and the other one isn’t.
If the situation TRULY came down to “money or life” then it wouldn’t even matter if the the seller sold the generator at cost. You’re implying that if the shivering victim had NO MONEY, the seller should just give it away (out of the goodness of his heart.) Nevermind shades of gouging or profits.
I’m not trying to put words in your mouth but that’s how I interpret “money or your life.”
For the record, I don’t think there should be any laws saying that people have to give away generators or other property. So we’ve eliminated that strawman.
But we weren’t talking about giving away generators for free. We were talking about telling people they had to pay all the money they have or they don’t get a generator. It doesn’t matter if they have $500 in their pocket or $5000. Whatever you got, you give me all of it or you go out and freeze. Do you think that’s okay and there shouldn’t be any laws against doing it?
Again for the record, I say there should be a law that limits excess price raising (aka “gouging”) of vital supplies and services during a natural disaster. That’s the topic of the OP, so what’s your opinion on that subject?
And if he doesn’t, the freezing guy would have a perfect right to kill him and take it. Survival trumps money. And the seller is a hypocrite if he complains; he chose to make it a matter of life or death.