You want wholesale prices in case you one day decide to sell to a shop and you want retail prices in case you decide to sell at art shows. Obviously if you do both, you don’t want shop owners to get made that you are under cutting their prices, so your retail needs to be in line with shops that you sell to.How is this not the genesis of sellers colluding to inflate prices arbitrarily? The price is not based on demand, but on not offending another seller. This seems a clear strike against those claims that the market naturally attaches value to products based what people will pay.
I'm not going to suggest that artisans shouldn't develop positive relations with those who sell their product, but let's call this what it is rather than hide it behind myths of free markets.
Are you familiar with the large literature on resale price maintenance?
ReplyDeleteNo.
ReplyDeleteSo you made a post arguing that an article on about.com (which contained a short section on a pricing rule of thumb) debunks the "myths of free markets" (whatever that means), with no particular knowledge of the economics of the subject? Aside from the resale price maintenance literature (which might suggest that this kind of agreement might be in the interest of both firms and consumers, depending on the circumstances), there's the question of how competitive the retail jewelry market is, and how competitive the wholesale market is, and how contestable the markets are. Are the barriers to entry high or low? What are concentration ratios like? Are entry and exit common, or are market participants stable and interacting repeatedly?
ReplyDeleteI know that I should have learned by now that people who don't know much about economics feel free to comment confidently on the subject, but it is a sign of my own irrationality that this unjustified confidence and outspokenness still surprises and disappoints me.
Perhaps it is a sign of irrationality for you to assume that this post is an attempt at a treatise in abstract economics theory. As much as I might enjoy researching and writing a jargonistic technical paper for some exclusive conference of ivory-tower professors on game theory or matrix algebra, this is a blog focused on political issues that bubble up under the feet of academics; or at the back of your hand, in this case: the academically unadorned, everyday ways that people actually interact and exchange.
ReplyDeleteSitting far from the madding crowd and lecturing one another about the shadows we might cast on our cave walls about what we think we perceive in "reality" and "human nature" is fun and all, but my interest here is not impressing those who might currently be dropping thousands of dollars on exclusive private school educations (tempted to end this with: "that could be gotten for $1.50 in late charges at the public library").
The last party I was addressing here was you in your transcendent discipline (please, no lectures about how mathematics is the universal language). I'm much more focused on the commentators who write the myths of free markets into popular political discourse, an arena too crude and unrefined to those with their heads in the clouds (tempted to add, "particularly those who confuse the sky with their ass"). But don't worry; when I am ready to operationalize, you'll be the first to know.
Some misperceptions in your post:
ReplyDelete-Economists don't study the real world and live in ivory towers. Economics is not checked for conformity to reality.
-Economics is about math.
Consider the following:
If retailers provide customer service, warranty services and exchange policies, and a retail environment, they have costs that wholesalers do not. If consumers can browse at the retail stores, but buy from the wholesalers at a cheaper price, then retailers will stop carrying that stock--not because of collusion, but because their inventory is not selling, and the retailer is suffering losses. The retailer is essentially doing the advertising for the producer at a loss. When the retailer stops carrying the product, the consumer is worse off due to the higher costs of shopping and getting information. The retailer is worse off because he or she cannot profitably carry a product that consumers want to buy. The producer is worse off because the market for his or her product is reduced. Resale price maintenance can be efficient.
Furthermore, the amount of competition in the market matters. If there are only a few jewelry producers, an agreement with retailers is not necessary to earn super-normal profits. A producer can simply raise both the wholesale price and the price at which he or she sells to retailers. Debeers doesn't need to conspire with jewelry stores to earn monopoly profits.
If there are many jewelry stores, and if it is possible for jewelers to sell a producer's jewelry at a higher price than wholesale while making a profit, then a collusive agreement is hard to maintain (not impossible, but difficult).
This conversation is reminiscent of past conversations with Creationists convinced that evolution is a conspiracy of elitist scientists who haven't stepped outside of their labs to look at the real world. This may be hard to believe, but economics has actual content, and it matters. You're no more qualified to discuss the economics of this than I am to discuss how to grow good tomatoes or Hawaiian history. Shouldn't you at least be interested in whether your charge--that resale price maintenance is a collusive arrangement that is harmful--makes economic sense?
Two notes first:
ReplyDelete-Economists do study the real world, and test hypotheses against data.
-Economics is not about math. Math is merely one tool in the toolkit.
Consider the following:
If retailers provide customer service and a retail environment, they have costs that wholesalers do not. If consumers can browse at the retail stores, but then buy from the wholesalers at a cheaper price, then retailers will stop carrying that stock--not because of collusion, but because their inventory is not selling, and the retailer is suffering losses. The retailer is essentially doing the advertising for the producer at a loss. When the retailer stops carrying the product, the consumer is worse off due to the higher costs of shopping and getting information. The retailer is worse off because he or she cannot profitably carry a product that consumers want to buy. The producer is worse off because the market for his or her product is reduced. Resale price maintenance can be efficient.
Furthermore, the amount of competition in the market matters. If there are only a few jewelry producers, an agreement with retailers is not necessary to earn super-normal profits. A producer can simply raise both the wholesale price and the price at which he or she sells to retailers. Debeers doesn't need to conspire with jewelry stores to earn monopoly profits.
If there are many jewelry stores, and if it is possible for jewelers to sell a producer's jewelry at a higher price than wholesale while making a profit, then a collusive agreement is hard to maintain (not impossible, but difficult).
This conversation is reminiscent of past conversations with Creationists convinced that evolution is a conspiracy of elitist scientists who haven't stepped outside of their labs to look at the real world. This may be hard to believe, but economics has actual content, and it matters, and calling economists ivory-tower academics won't make your beliefs true. You're no more qualified to discuss the economics of this than I am to discuss how to grow good tomatoes or Hawaiian history. Shouldn't you at least be interested in whether your charge--that resale price maintenance is a collusive arrangement that harms consumers by raising prices--makes economic sense? Saying that one's own view is reality and everyone who questions is debating Platonic forms seems like a strange approach to take.
And what was that bit about exclusive private school educations supposed to be about? Was that a jab of some kind? And what did the Good Will Hunting clip have to do with anything? In the clip, Matt Damon's character is actually familiar with the material to which the jerk refers. His rebuttal is credible because he knows the literature. You apparently haven't heard of resale price maintenance; surely you're not saying that your position is analogous to Matt Damon's. Have I missed the point?
I'm reminded less of Good Will Hunting and more of Stephen Colbert: http://www.wikiality.com/Truthiness
And your side of this chat reminds me of a magisterial priesthood that tries to shroud a High Mass in latin rather than deal with it in a common vernacular. There is a haughtiness and dismissiveness to the field-special jargon you throw around even though most of the people you are studying probably would not be able to translate the jargon.
ReplyDeleteWhat bothers me most is that you act as reliant on the language you use and its ability to impart truth (facts?) to people who don't even understand you (thus the reference to your main audience--students in exclusive universities).
Your terms are impractical outside the class or conference hall, which is why they don't appear in the jewelry seller's discussion of her strategies for selling. And I dare say that they also mask a penchant for insulating economic relations from political or popular critique, because you can always fall back on the argument that the critics simply don't understand the concepts well enough or they would be of your political persuasion as well as agreeing with your concepts. Except for the cases of public intellectuals who see the need of feedback from the bottom, academic discourse tends to be imperial in reach and shuns the unoriginal.
In ways it is like religion. A point that I raised before. Science, and the softer sciences that try to replicate the harder ones, rely on unquestioned assumptions (if not of universal laws, then of human reason and interaction), which resembles faith, and in some cases dogma. Is scientific method ever questioned in science? If not, then it borders on religion.
I mean, don't get me wrong: I believe as absolutely as you do that "competition matters." But how it matters is the bone of contention and academic shouldn't act as if they've written and closed the book. The whole world is not "publish or perish."
Finally, I've never claimed to be qualified to discuss the academic field of economics, and I don't know which part of "I am focused on political issues here" you don't understand. As long as the political discourse in the public realm turns to economics, none of us has to be in your guild to talk about policies that affect our daily lives.
I don't know whether you long for an oligarchy where only economists control the political discussion, because you seem to conceal your own political persuasion in the academic jargon. But if you really mean to suggest that in a constitutional democracy, those with great stakes (as in, health and lives) in economics who don't share your technical grasp should be excluded from a discussion--the implications of which are no different than a thoroughly technical grasp of growing tomatoes--then I couldn't disagree more.
Sorry about the double post; blogger gave me an error message the first time, so I tried again later. I didn't realize the first one ultimately went through.
ReplyDeleteWhy do you believe that I am talking about economics as presented in exclusive universities? I teach mainstream economics, as taught from the ivy league down to community colleges.
This is really very simple. You titled a post "Wholesale/Retail: The Beginning of the End of the Free Market?" If this is not a post about economics, I don't know what is. You then made an argument (a very strong, unqualified argument at that) about economics when you clearly didn't know much about the economics involved. Worse than that, you are aware you don't know the economics involved, and you believe that you're still qualified to have a strong opinion. In fact, even though you don't know much about the subject, you believe your very lack of knowledge makes you qualified to discuss it, whereas the knowledge of a discipline that studies this very subject should be ignored (hence the dismissive comments about impractical terms and magisterial priesthoods). Am I therefore more qualified to discuss Nashville politics with you? I've done little research, and have no background in the area. Perhaps I should be the one running the blog? No, of course not. I am qualified to comment on economics when it comes up, but not on much else.
An important part of self-knowledge is knowing one's limitations. Where is your "doubt, self-interrogation, and agnosticism"? This is not just hubris. You are being dishonest with yourself, and doing a disservice to your readers. The proper response when an expert points out reasons why one might be wrong is to say "Ah, that's interesting. I hadn't thought of that," at the very least. A better response would be to think to oneself "Maybe I am not qualified to discuss this" or "Maybe I should ask an expert first."
I frequently encounter global warming deniers when I teach environmental economics. They are convinced that global warming is a conspiracy. The honest ones are willing to listen to evidence from climatologists--the experts--and might change their minds. The least honest ones are not interested in theory or evidence, and discussion with them is unproductive. Does the language of climatology insulate it from popular critique? Well, maybe, but does that mean the climatologists are wrong and the public is right? Ignorance and force of will won't cause global warming to go away, just as lack of public understanding of resale price maintenance won't make such agreements anti-competitive (or pro-competitive, for that matter).
In any case, I explained the economics of resale price maintenance in non-technical language in my last comment. I didn't obfuscate or confuse or conceal. If you don't like my explanation, Wikipedia has a decent one, and Mankiw has a good blog entry on the subject.
This has nothing to do with political persuasion. I've talked about the economics of market failure with you before, and on my own blog. Hell, when I discuss economics and policy with economists and other academics, we not only point out flaws in each others arguments, we point out flaws in our own. Being a scientist means putting truth first and politics last. If the public believes the earth is flat, we'll do our part to inform them, but we're surely not going to accept that the people "outside the guild" are qualified to opine on the earth's lack of curvature, and we're not going to shut up just because the public doesn't like what we have to say. The stakes are too high--unlike growing tomatoes--to let ignorance prevail. We can't make people listen, though, and the incentives for the public to seek and absorb information from experts are poor.
Not knowing economics is not a sin; in fact, for most people, it would be a waste of time to learn about it. Venturing strong opinions on a subject about which one knows very little, on the other hand, is imprudent at the least, and dangerous when one has a microphone and a loudspeaker. At the very least, an honest post from you would be titled "I Don't Really Know Whether or Not Pricing Agreements Like This Are Good or Bad for Consumers". You seem to believe that if you've got politics in mind, a discussion can and should ignore the economics. Do you even care that acting upon your post--prohibiting such pricing agreements--might make consumers worse off? It is also possible that such an agreement might be collusive and make consumers worse off, but figuring that out is more difficult than reading an about.com article. (For example, if one finds a resale price maintenance agreement in a market in which consumers need not examine a good before buying, that is more likely to be an anti-competitive agreement).
Having said all that, I think I'm done with your blog. I'm sad to say that I think you're probably more like the global warming denier or the creationist than the curious but skeptical intellectual (and I do believe that skepticism is a virtue, including skepticism of economics). Trying to get you to consider the preexisting body of knowledge on a subject before posting is probably a waste of my time. I can teach economics to a larger number of people by focusing on teaching my students than on trying to stop you from misinforming people.