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Sillynomics

Posted By Don Boudreaux On September 25, 2013 @ 7:02 pm In Competition,Complexity & Emergence,Man of System | Comments Disabled

The new paper on the minimum wage by David Lee and Emmanual Saez [1] kept pecking at my memory today.  It reminds me of something – something at first vague, but more and more clear as the day wore on.  Finally I remembered.  That paper reminds me of a series of papers, and genuine concern, in the 1980s that non-price competition among firms for customers poses such a serious threat of harm to consumers that antitrust authorities should be empowered to police against such competition.

One version of this concern was the literature on “non-price predation.”  The idea is that Acme Corp. in industry might make its products so darn attractive to consumers that all of Acme’s rivals go bankrupt and no firm ever again dares to compete with Acme in industry X.  Awfully silly stuff, if you ask me.  (And although no one asked me, I wrote some papers critical of the entire “non-price predation” bugaboo.  I might blog on these at a future date.)

Another version of this concern with non-price competition took the form of criticism of manufacturers that take steps to prompt the firms who retail their products to compete amongst themselves in non-price dimensions in order to ensure that these retailers supply better customer service to consumers and potential consumers of the manufacturers’ products.  Of course, because good customer service isn’t free, these efforts by manufacturers would entail higher retail prices for the manufacturers’ outputs.

So….  It’s possible, don’tcha know, that the value of the better customer service to the consumers of product who value that service highly enough to pay the higher price of Y (the “marginal consumers”) will be insufficiently high to offset the welfare losses suffered by other consumers of who, although they, too, must pay the higher price for Y, do not value very highly the resulting better customer service.  These latter consumers are called “inframarginal consumers.”

In short, it’s possible that unfettered competition – when each manufacturer is allowed to try its own mix of price and nonprice means of competing for consumers - will, to the extent that that competition takes nonprice forms, harm some consumers so much that those harms outweigh the gains enjoyed by other consumers.  So naturally economic theory – which shows this possibility - was read as scientifically calling for active bureaucratic oversight of nonprice competitive efforts.  Pretty silly stuff, if you ask me.

Bob Ekelund and I published two papers on this matter.  One was in the Hofstra Law Review [2], and the other was in the Southern Economic Journal [3].  I’ll see if I can find a way to post versions of those papers here, because it’s possible that if you, dear Cafe patron, do not have ready access to those papers, your loss of utility will be so great that our economy would have to be regarded as a complete failure.

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URLs in this post:

[1] new paper on the minimum wage by David Lee and Emmanual Saez: http://elsa.berkeley.edu/~saez/lee-saezJpubE12minwage.pdf

[2] One was in the Hofstra Law Review: https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=17+Hofstra+L.+Rev.+137&srctype=smi&srcid=3B15&key=d0415bad9f29e54c1f5deaf52647cab7

[3] Southern Economic Journal: http://www.amazon.com/dp/B00096K1H2

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