Many years ago my father advised me to avoid antenna design – “Too much black magic.” I took that advice; but I seem to have fallen into a similar trap, i.e. pricing.
Consider this pricing problem. You sell a product which two classes of people. One class, 10 people, would be willing to pay 100$ a unit. A second class with 90 people in it are willing to pay 10$ a unit. So if the vendor charges 100$ he will make $1,000; if he charges 10$ then he will also make a $1,000. If the the first class is willing pay a bit more or the second class is willing play a bit less then the vendor will profit if he makes only 10 units.
That story is a bit bloodless so let’s put some adjectives on these classes. The first class is desperate if they are willing to pay so much. We might say the first class is very loyal to the vendor’s product and nothing else will do. We might say the first class is locked in.
Early in the Bush administration a handful of electricity vendors in California realized they were in exactly this situation. They could make money if they sold less electricity. So they shut down some generating plants. They called it maintenance and complained about excess regulation. The first class of buyers, unable to switch, locked in, and addicted to electricity then drove up the price to amazing heights. At the time experts knew exactly what what was going on but the regulatory organization had been entirely cooped by the industry and so nothing was done. Amusingly the Bush folks talked about how we needed more supply which was true, and suggested we should open up new oil fields which was irrelevant.
There is a picture in my local paper of a long line in front of a pharmacy down the street from me. Long lines are a symptom of a group of folks in the first. They were queued up to get flu shots. The supply of flu shots has fallen sharply. The price is up. Clearly this market is just like the one in the model above. There is a core of desperate buyers willing to pay a lot; as demonstrated by their willingness to wait in extremely long lines. I’m suspicious that it’s also an example of the kind of story shown above.
What’s fascinating about some of these scenarios is how the trigger of the mode switch could come from anywhere. For example an investor in firm A might strive to get firm B shutdown; say by reporting safety violations to a regulator. Then when the firm B gets shutdown and the large class of low price buyers go looking for an explanation the regulator gets blamed.
The California electricity debacle shown how deeply the pro-business Republicans have undermined the regulatory systems in this country and sadly it makes me terribly suspicious about the current flu vaccine situation.
Meanwhile the Bush administration thinks scientific fact is a special interest group, and certainly not part of their base.
The bad guy who decides to manipulate a market from the high volume low price mode into the low volume high price mode needs two things, means and motive. The regulator is just one means. I suspect that if the motive was large enough then the bad guy would be careful to obscure his trail. Having the means in one country and the benefit in another be useful to the conspircy. This obscuring of means and motive makes it harder to track down the evil doer – and more fun for the conspiracy mined. If the government charged with doing so has as it’s default presumption that regulators are nothing but trouble and markets are in always wise and insightful then the chance of any intervention or investigation falls and the probability of bad actors rises. At that point the government becomes a coconspirator.
Brad DeLong http://www.j-bradford-delong.net/movable_type/2004-2_archives/000420.html takes a stab at the pricing issues; but he comes at it from the point of view that supply and demand are unstable or unpredictable and so you get price spikes. I’m more interested in what happens as regulatory dry rot set in and bad actors come to play.