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TODAY’S STORY
21 May
,
2022

When is it okay to call someone greedy or biased?

“‘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.

But exactly when do you earn the right to call someone greedy?

Let’s see 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: 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

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?

Can you call Bugatti Veyron manufacturers greedy?

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?

American Pharma

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?

Amazon and 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.

Reality can be vastly more complex than what I’ve mentioned here.

But the point is to help you think about businesses and capitalism in a more nuanced way, before resorting to calling people greedy or assuming mal-intent on the part of businesses.

And I hope reading this piece has given you enough questions to not judge businesses impulsively and attribute everything to capitalistic greed.

Enjoy the weekend, and do write back to me with your thoughts.

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