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A Recent Conversation With a Non-GMU Graduate Student

In my latest column for AIER, I relate a frustrating conversation that I recently had with a graduate student enrolled at an elite university. A slice:

Don: “I want to challenge your claim about what it makes sense for entrepreneurs to care about. But before I do so I must insist again that even if you’re correct about entrepreneurs being unduly interested in catering to rich people, a study that finds that inflation is higher in markets that serve low-income people than it is in markets that serve high-income people doesn’t pass the smell test. But putting that issue aside, let’s get to a deeper issue: why do you suppose that entrepreneurs are more interested in selling to rich people than to poor people?”

Alex: “Rich people have more disposable income. That makes them more attractive customers than poor people. So more entrepreneurs compete for rich people’s money than for poor people’s money. This greater competition is what constrains sellers in markets that serve rich people from raising prices. No similar competitive constraint keeps prices low in markets that serve poor people.

Don: “So you believe that prices for goods and services bought by low-income people are excessively high because of insufficiently intense competition in the markets in which those people buy. Is that correct?”

Alex: “Yes.

Don: “Well then, why don’t the entrepreneurs who greedily compete to sell goods and services to rich people – but who are constrained by competition from raising their prices too much in rich-people markets – turn their attention to markets for goods and services bought by poor people? According to your story, that’s where the excess profits are.”

Alex: “Low-income people don’t have enough disposable income to attract more businesses to serve them.”

Don: “Really? How can that be given that you’ve just admitted that low-income people do have enough disposable income to pay prices that are monopolistically high? Precisely because low-income people are more sensitive to price increases than are high-income people, entrepreneurs who enter markets that serve low-income people will have an especially easy time at competing these consumers away from the current crop of merchants who insist on charging monopolistically high prices.”

Alex: “Markets don’t really take account of the preferences of people without money.

Don: “Ummm, what? You’re changing the subject. Of course, by definition markets don’t take account of the preferences of people who have no resources with which to participate in markets. But even the poorest people in wealthy countries such as the UK and US have enough resources to participate in markets. Indeed, even you admit that poor people in the UK not only have resources to participate in markets, but enough resources to be able to pay monopolistically high prices. So again, those prices should attract more businesses to serve lower-income communities.”

Alex: “But once more, the empirical evidence says they don’t!

Don: “As I said, I’m suspicious of the empirical study that you keep talking about. But let me here grant for the moment that it’s accurate. We then must ask: If low-income people are indeed beset by monopoly prices, why don’t entrepreneurs sweep in to compete those prices down to competitive levels? After all, such competition takes place for goods and services sold to high-income people, who are less sensitive to price changes than low-income people. The answer for any such lack of competition can’t be that entrepreneurs aren’t interested in earning profits by selling to poor people. The answer, instead, must be that merchants who would enter markets to compete for those monopoly profits are blocked from doing so by some artificial obstacle or obstacles.”

Alex: “I don’t know enough about the UK to say if that’s so.”

Don: “Nor do I. But I do know enough about economics – and about economic history – to be certain that the story that you’re telling about how inflationary price hikes are higher for low-income consumers than for high-income consumers makes no sense unless there exist artificial barriers to competition for the patronage of low-income consumers.”

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