Prices aren't just about supply and demand, but control over supply and demand
dougaldlamont.substack.comThe PoW camp example is interesting, but the way this article talks about risk and return makes no sense. The author gives an example of a lottery with a $1m prize, funded by selling 1 million tickets at $1 each, then introduces a "Mr. Behemoth" who can buy as many tickets as he wants. Since he can buy 600k tickets to win 400k, for a 66% return at 3:2 odds, or even 900k tickets to win 100k for an 11% return at 9:1 odds, the claim is that he "has complete control over risk and return."
...No? The expected value is 0 in either case.
.6 * 400 + .4 * (-600) = 0
.9 * 100 + .1 * (-900) = 0
The ability to slice a given risk-return profile into different pieces, or different amounts of leverage, is called "finance". But Mr. Behemoth in this case has the same expected return as everyone else, so the example has nothing to do with "control of supply and demand."
It was so close to a good example, too. Increasing the payout to $1.1M would make the example make so much more sense. It's positive EV for everyone, but only Mr. Behemoth can control his variance. (This is ignoring finance.)
That example was terrible. The ivory example was terrible. The housing market example is stupendously bad. Not a great article.
It shocks me that this article could be written without mentioning the phrase "price elasticity" a single time (a word I learned in a class literally numbered "econ 101").
So basically another blog post describing someone almost re-discovering basic economic principles from first principle?
In which paragraph do you think that phrase belongs?
> That “equlibrium” is an assumption that there are forces in the market that will moderate excess - that the market is self-balancing. This is the argument against regulation or government intervention.
> For example, it might be assumed that if supply shrinks, that prices will increase, which will reduce demand because fewer people can afford it, which will lead to a rebound in supply - which means prices will drop again. This seems intuitively correct.
About here would do it.
Economics terminology is important because it gives us a shared foundation for science and discussion.
So when people discuss economics but act like they have explored a novel concept that is economics 101, it tends to get mentioned.
The author's point here seems to be a bit different than price-elasticity, though. If this were a price elasticity article, then you'd expect this sentence:
> There’s another possibility, however. Imagine that there is a demand for a specific luxury good - say, ivory from elephant tusks.
to be followed with something like "but as it happens, in some cases like luxury goods, demand can actually increase as prices increase! This is called a Veblen Good, isn't that interesting!"
The author instead makes a different point: the 'supply' of elephant ivory can increase despite the underlying rarity of the natural resource, because rising prices create more willingness to poach, and market prices are about how much you have to pay the poacher, not the elephant. This isn't necessarily self-balancing because eventually you do run out of elephants entirely.
This doesn't really strike me as a comment about price elasticity per se.
Indeed. I realized this. But I believed the comment was that the article never references the phenomenon by name while referencing its effects.
Good summary of the articles position though.
But then, the following example with elephant tusks doesn't fit the narrative of an alternative situation to elasticity, because elephant tusks are not inelastic; they are nicely elastic.
Inelastic items are:
- things that are dirt cheap, so nobody cares how much they exactly cost, like 5 cents versus 10 cents for a candy.
- things that people desperately need, and for which there is no alternative, so they fork up the money when the price is jacked up.
Poachers cannot do anything that will keep the demand the same while prices go up due to low supply due to ivory not being an inelastic good.
The title. Replace "control over supply and demand" with elasticity.
The author has no background studies on economics.
I feel like even doing Wikipedia level reading on the topic should’ve been enough to stumble upon it though.
It read more like a slight against the LToV than anything else.
The desire to extrapolate economic interpretations from toy examples is unending. See also the two-people-with-cows-on-an-island example that gets paraded around and has never existed except in the heads of the terminally marginal-pilled crowd.
I'll never understand why people decide to blog about topics in which they don't have any background studies.
There are loads of topics where you can get away with it but not an academic topic much less the very first lesson everyone in taught in Economics
One odd thing about economics is that people will be familiar with roughly half of an introductory textbook, and then think they know everything about the subject. The fact that there is such a thing as "market power" is understood by every economist, and is central to the topic of "industrial organization". Increases in market power are even one of the standard explanations for the business cycle (they call them "markup shocks). Maybe the author knows that, but it's not clear from the post.
Indeed. You have to read half a textbook and Joel Spolsky's "Camels and Rubber Duckies" before you can start to pretend to know everything.
Really interesting to see Dougald Lamont trending here on Hacker News: he was most recently the leader of Manitoba's Liberal party.
He lost his seat a few weeks ago in a provncial election where the party was reduced from three seats to one.
> But instead of reducing demand, more poachers may enter the market, because the high value of the tusks means they can make more with less work. The cost of the good is not related to its real-world rareness, but to the cost of paying people to obtain it, which may be high or low.
This doesn't rationally follow at all.
The rareness (low supply) of a good is the net sum of how hard it is to obtain, due to all the possible reasons for that.
More poachers may enter the market, but with fewer elephants left alive, they cannot find elephants so easily, which means it takes more time and effort: the MTBE (mean time between elephant) goes up, making the hunt more costly. They may have to engage in increasingly hostile and violent turf wars with other poachers.
More poachers entering the market will not prevent a reduction in demand; it isn't something "instead of reducing demand".
If the market maintains the same level of interest in the good, the demand curve stays the same, and the only thing that changes demand is the current price point, which determines where on the demand curve the market is.
The author of the article doesn't seem to understand the difference between a reduced demand due to a movement of price along the same demand curve and actually reduced demand, whereby the market is less interested in the good, and buys less of it at every price point.
Case in point when someone should take an Econ 201 course rather than try to explain something from their incorrect first principles.
OPEC knew this for ages.
> It’s very clear that large companies do abuse their market power (price-fixing and collusion)
Can we get some examples of this? (not implying otherwise)
I think Amazon's "most favoured nation" clauses[1] qualify. Or deals like those between Amazon and Apple[2] that excluded third party sellers of Apple products from competing with Apple themselves.
Edit: Another example was the collusion between Canada's bread makers[3].
[1] https://arstechnica.com/tech-policy/2021/05/amazon-sued-over...
[2] https://9to5mac.com/2022/11/09/apple-amazon-lawsuit-price-fi...
[3] https://financialpost.com/news/retail-marketing/why-the-hell...
It's also worth mentioning that such activities are generally illegal. The issue is more the enforcement of the laws than it is the laws themselves.
The problem is that "illegal" in the context of a corporation means a fine. If the fine is less than the extra revenue generated (and it often is), there's no reason not to engage in the illegal behavior.
From the bread pricing scandal, the amount of coordination that was going on between supposed competitors is crazy. The fact that it took "a decade and a half" to prosecute the case means that much more subtle collusion is probably very common.
> “Retail customers would call threatening to reject a price increase if another retailer was offside in terms of pricing alignment.”
> The coordination was particularly tough between discounters including Walmart, Giant Tiger, Loblaw’s No Frills, Sobeys’ FreshCo and Metro’s Food Basics, the document says.
> “None of them wanted to be the first to implement the price increase …There was always a negotiation process going back and forth between the four retailers where the supplier was trying to coordinate it, because somebody had to be the first to move.”
> According to redacted witnesses cited in the documents, the individual retailers involved were all in favour of taking price increases, and full-price grocers such as Loblaw tended to hike prices first, followed by discounters such as Walmart.
> The problem is that "illegal" in the context of a corporation means a fine. If the fine is less than the extra revenue generated (and it often is), there's no reason not to engage in the illegal behavior.
I think it's a bit worse than that.
Take a look at sports where plenty of teams will very willingly over-pay for players in terms of salary or even trade say 4 draft picks for a player when you'd expect at least 1 of those picks to draft somebody of a similar caliber.
In situations where the individual can personally gain (say from winning playoffs or a big bonus from extra sales) and the team (corporation) would be liable for the downside there's incentive to make a technically losing move. If the team doesn't do well you're fired anyways so it doesn't matter how much of a long-term bind you cause. Just like if the corporation takes a fine 5~10 years later like you've definitely gotten some fat bonuses in the interim that won't be clawed back.
I mean, I don't disagree, but this is still an enforcement issue. Society still isn't really sure how to easily prosecute these massive companies without also kicking open the doors to some concerning behavior.
To add to the sibling comment: rent optimization software that facilitates collusion between ostensibly competing landlords:
https://arstechnica.com/tech-policy/2023/11/14-big-landlords...
Nothing that this article discusses is particularly noteworthy or novel - Literally chapter 7 of the most common Econ 101 book (Paul Krugman's) covers "Imperfect Competition" in much better, less circular detail.
However, the mental gymnastics the author performs to reach these conclusions is impressive on its own right. "You are not buying an apple, but the property rights to an apple" is just the sort of non-parody content I have come to expect from Substack writers at this point.
If you are actually interested in how supply and demand work in non-monetary markets (like the POW camp example), I cannot recommend enough "Who Gets What and Why" by Alvin Roth, the father of Kidney exchange programs.
Nice description. Completely free markets are rarely efficient, but well regulated ones can be. All sorts of risks and externalities can substantially increase transaction costs. Crypto currencies show that even the most basic (store of value and currency exchange) economic transactions have substantial overhead. Most people end up using exchanges that have lower cost transactions with acceptable risk (most of the time).
Freakonomics, 'sellers will charge the maximum amount they can'.
Markets have been glorified in the modern political discourse, at least in the West. It's one of the core tenets of neoliberalism: markets for everything. Side note: markets actually have nothing to do with capitalism. If you think they do, you don't know what capitalism is.
All of this stems from the idea that independent actors will create an "efficient" market to reach a price equilibrium in the most Econ 101 way possible with an awful lot of hand waving. This ignores the desire and ability for actors to put their thumbs on the scales.
Markets exist to extract wealth from participants to support the current economic order. This is done through lobbying, rent-seeking, putting up barriers (or enclosures if you prefer), restricting competition, using market power to crush competitors and reaching a monopoly or oligopoly to maximize wealth extraction.
This is called friction.
It is part of the Supply & Demand model. Governments and other factors add friction which impact the elasticity of supply and demand curve.
Modern Capitalist societies are not pure, governments can drive friction through regulations, fees, taxes, codes, and a million other factors.
Let's not forget that the narrative behind scarcity will also drive prices.
Nonsense. He who can destroy a thing, can control a thing.
There is no practical difference between the two.
Thank you. I really can't find words to explain how baffling this whole thing feels. "Integers aren't just positive" strikes me as a similar title, and the tone isn't "hey other people without a background, I think something clicked for me" so much as "ahhh i've found something they missed!"