“‘Why do brides spend so much money - often thousands of pounds — on wedding dresses they will never wear again, while grooms often rent cheap suits, even though they will have many future occasions that call for one?’
Dulski argued that because most brides wish to make a fashion statement on their wedding day, a hire company would have to carry a huge stock of distinctive gowns — perhaps forty or fifty in each size. Each garment would thus be hired only infrequently, perhaps just once every four or five years. The company would have to charge a hire fee greater than the purchase price of the garment just to cover its costs. And since buying would be cheaper, no one would rent.
In contrast, because grooms are willing to settle for a standard style, a hire company can serve this market with an inventory of only two or three suits in each size. So each suit gets hired several times a year, enabling a hire fee that is only a fraction of its purchase price.”
— The Economic Naturalist
The above example represents a price discrepancy that could be simply explained by the law of supply, demand, and economies of scale — without resorting to allegations of gender discrimination or gender bias.
But is reality so simple that everything can be explained with supply and demand curves? Not quite.
You need to take supply-demand equilibrium as the starting point for your thinking. But don’t be surprised if the outcome you observe in a specific context differs substantially from what supply and demand curves would predict. In such cases, look for reasons for that departure — for example, monopoly, asymmetric information, regulations, psychological factors, etc.
You will find many such departures and many such reasons, but does it mean that supply and demand is useless in the real world?
No.
I’d argue that it’s still the starting point and will give you a better foothold on the problem than any other approach that I know of.
As I’ve written about multiple times in the past, economics and markets are all about underlying incentive structures. Supply and demand only works in a hypothetical free market where everyone is a rational actor and has needs matched with their ability to pay. In the real world, markets are rarely free and this is hardly the case.
Let me start by highlighting a commonly known problem in Economics called the Public Goods Problem.
Consider this scenario:
A legislator proposes a bill in the parliament that heavily taxes a few corporate companies to disincentivize certain practices that may pollute the environment.
Let’s say this legislation implies a long-term benefit of ₹1000 on the 10,00000 individuals living in the area who are affected by this pollution. At the same time, it also imposes a cost of ₹10 Cr each to these 10 companies who will be affected by the legislation.
Who will bid for and against the law? And who will bid more strongly?
It will be these 10 companies. Because the benefit from this bill is divided amongst 10,00000 individuals who share a public good — the environment. But the cost of it is divided across just 10 individual companies. Consequently, they have a much stronger incentive to lobby against this bill. Being just 10 units, they can organize more easily to oppose the bill. Even the amount that these companies have to shell out as bribes to oppose the bill will be much lesser than the cost they would incur if the bill were passed.
Why? Simply because the larger public isn’t incentivized enough to push the bill the other way.
The small benefit spread across 1 mn people doesn’t justify the cost of going out of one’s way as an individual to support the bill via monetary donations. Hence, the amount the small group of companies is able to offer politicians to oppose the bill will be more than the amount the large public will offer to support it.
In Economics, this is known as the Public Goods Problem.
The problem is reinforced by a second consideration: information costs.
Assume that information about the effect of legislation on any individual can be obtained, at a certain cost of effort, time, and money.
For the individual who suspects that the bill may benefit him by ₹1000, it is not worth obtaining the information unless it costs <₹1000. His possible benefit is small and so is the effect of any actions he is likely to take on an individual level to help the bill pass.
So here, we see that the member of the dispersed interest chooses to be worse informed and incentivized than the member of the concentrated interest, and they are perfectly rational to do so! This is rational ignorance; it is rational to be ignorant if the cost of information is greater than its value.
And my point here is that economic problems are way more hairy and structural than armchair activists would have you believe with their loud opinions.
Now, let's talk about the issue of calling someone (usually a corporation) greedy.
More specifically, when do you earn the right to call someone greedy?
Let’s look at some examples.
Packaged Water
Let’s say you’ve gone trekking with your friends. After a long and hard trek under the harsh sun, you arrive at the summit and are now looking to rest, relax, and enjoy the breathtaking view, along with some refreshments of course. You see a vendor there selling packaged water bottles.
His quoted price per 1L bottle:
₹500/-
Shocked by this exorbitant price, you’re quite tempted to fight him for looting customers.
But being a level-headed person, you take a step back and ask him why it is so expensive instead. He gives you a couple of reasons:
- The logistics of bringing packaged water to the top of the mountain is expensive
- To sell refreshments here, you have to obtain a license from the government which is pretty hard to get and to get it, he needed to pay hefty bribes to a few officials
- The trek is susceptible to being shut down for months on end due to natural weather conditions, so he has to take that risk into account as well
Upon hearing these reasonable arguments, and seeing no other alternative to him on the summit, you realise selling water on the top of a mountain is not as easy as it looks. You’re tempted to still bargain with him, but you now at least don’t have any strong reason to call him greedy.
Bugatti Veyron
The demand curve shows for each price how much the consumer would be willing to consume given that consumers have the necessary ability to pay; they have sufficient income, wealth, or access to credit. Does this mean that there is no demand for $12.6m Bugatti sports cars even though I don’t have the ability to pay for them?
Not really. I know I would want one.
Also, does it mean that the makers of a Bugatti Veyron are greedy for pricing the car that exorbitantly?
The car is priced the way it is for multiple reasons:
1. Information asymmetry and knowledge-creation: No one knows the kind of precision engineering and craft that goes into making a Bugatti Veyron but the manufacturers themselves
2. Once money can buy all basic comforts and luxuries, consumers with additional expendable income increasingly look for goods that have more intangible signalling value. They don’t mind paying high prices for unique experiences; in fact, paying a high prices is often necessary for them to differentiate themselves.
Would these consumers buy a Bugatti Veyron, if a car as good as it is were available for half the price? Or would they still go for a Bugatti due to the brand and what it signals?
Is it possible to manufacture a Bugatti Veyron for half the price? I really don't know, but it is a good question to ask, is it not?
Farmers letting their crops rot and go to waste
I once visited a village near Mumbai called Palsunda. I spoke to a farmer there and he told me that the economics of carrying and selling the produce at the nearest APMC is so bad that he would rather feed himself and his family from the produce and let the rest of it rot.
Is the farmer a bad person for letting food go to waste? Or is he just stifled by bad MSP regulations and cartelisation of APMCs?
The Pharma Industry
Are pharmaceutical companies greedy for charging for vaccines, a public good? If they didn’t charge for the vaccines, where would they get money for research and development from?
If your answer is the government, how does the government make its money? Find out!
Amazon and the issue of unionization
Unionization is a specific instance of what’s commonly known in economics as “contagious consolidation.”
When one industry consolidates, for whatever reason, there’s a greater incentive for those it does business with to consolidate as well, out of fear of being steamrollered by a more powerful customer or supplier.
In the case of Amazon, let’s say Amazon provides most of the employment in a city or state, and thus, by virtue of being a monopoly recruiter, can dictate wage prices.
Because where else would people go anyway? They have no option but to come work at Amazon.
Unionization of employees is a natural immune response to such tactics.
But wait a second. Maybe things aren’t as black and white.
Why does Amazon want to reduce wages? Two reasons I can think of:
1. It wants to subsidize costs for its customers
2. It wants to pay itself and its senior leadership hefty sums of money
Think about what happens if either of these parties is unhappy. Customers will go shop elsewhere and senior leaders will go work at other companies with better compensation. Eventually, it is Amazon as a company that will have to bear the brunt and consequently be forced to reduce wages for its workers anyway.
Is Amazon greedy? Or is it also tied up by and subservient to various market pressures that aren’t under its control?
The point with these examples is not to give a definite answer.
The point is to showcase that reality is vastly more complex than what it seems on the surface and in the media.
The point is to help you think about businesses and capitalism in a more nuanced way, before resorting to calling people greedy or assuming malicious intent on the part of businesses.
Of course, malicious businesses do exist, like malicious people do. But before opinionating, make sure your opinions are rooted in sound structural explanations behind observed phenomena. Because the media works and reasons in events, but reality works in structures and systems. No event happens in isolation, but is just a visible symptom of a long history of systemic decisions and incentives.
And I hope reading this piece has given you enough questions to not judge businesses impulsively and attribute everything to capitalistic greed.
