Could you offer any background about yourself or would you prefer to stay totally anon. In which case I will thank you again for your writing and not bother you :)
No. This is mostly wrong. In every cartel, there is an incentive for each independent firm to cheat. That drives prices down.
We’ve seen this in OPEC and every other so-called cartel. In the 1970’s and 80’s, Saudi Arabia was the “enforcer” for OPEC. If they thought too many were “breaking the rules”, they pumped so much oil that they crushed the cheaters. That power didn’t last forever.
For any cartel, there must be an enforcer. This is also ignored.
The author ignores economies of scale, which lead to fewer producers. The author also ignores government participation in the market with subsidies - as in health and education. It’s these subsidies that drive up prices.
Worst of all, the author speaks of a wealth transfer from poor to rich when an innovative new product is priced for profit. That is Luddite thinking. *Everyone* is enriched by the new value created. The innovator may capture more of the newly created value than the author thinks is fair, but *nothing* is “transferred” from the poorer, who are in fact also enriched by the newly created value.
Are you sure you're commenting on the right article? This is all covered!
On cheating:
Although it is theoretically possible for a group of firms to obtain monopoly profits by forming a cartel, one learns in an introductory economics class that this is difficult in practice because cartels are inherently unstable. There is a high temptation for any cartel member to cheat. By exceeding your quota, you can take advantage of high prices and unmet demand to make a lot of money.
In our widget example, perhaps instead of selling 700,000 widgets at $13, you sell the full million at $12.75. You would make $3.75 times one million instead of $4 times 700,000, that is $3.75 million instead of $2.8 million. The problem is, everyone will also realize that they should cheat and they will end up driving everything back to the competitive price of $10 and everyone will lose their monopoly profits. This tends to happen in real life, too; OPEC sets production quotas that smaller members sometimes violate.
On enforcement:
Returning to our original puzzle, it is clear that the secret to a successful cartel is to recruit the government to your side. The government can make anything legal. The government also will solve the other typical cartel problem, the temptation for members to cheat and undermine the whole enterprise. If violating a quota is actually illegal, enforcing compliance becomes much easier.
On government subsidies in health and education:
As a bonus, convince the public that the government should try to rectify the situation by offering subsidies to consumers. This will do nothing for affordability as long as it is not coupled with price controls, as the cartel has enough market power to raise prices to capture the subsidy. The net result is a new direct transfer of wealth from the government to cartel members, which is exactly what you want. This is a standard tactic you see in higher education, healthcare and housing.
On innovative new products:
It is now fashionable to be concerned about the monopoly power of Big Tech, and to have an opinion about Amazon’s private label efforts or Apple’s App Store policies. Big Tech is very visible, perhaps so much so that it is overrated as a threat. Big organizations like Amazon are easy to track and regulate. We are already predisposed to think of big corporations as an evil menace.
Cartels are effective precisely because they do not look like evil monopolies at all. The coastal homeowner campaigning against new development looks like your mother, and very well might actually be your mother. Doctors and schoolteachers are the healers and educators of society, not the enemy. None of them believe that they are advocating for policies that take from the poor and give to the rich; they are certain that the true problem with housing must lie with developers and investors, or that the true problem with health care must lie with administrators and CEOs.
This is what makes cartels more dangerous. The tech sector is actually quite small compared to housing and health care; none of the major tech companies have revenue much greater than $200 billion globally, while housing and health care reach into the multiple trillions of dollars per year in the U.S. alone.
What?! This was not a good start for me on Substack!
I think I did comment on the wrong article. I'm new to substack. I just signed in and saw these two responses. I saw a link to go to the original thread, and it was complletely different from what I had read previously. I was reading through it, thinking "I don't remember *any* of this. This is good stuff!
My original comment was from awhile ago, so I have no idea what I did. I was probably on my phone. I only completed my sign-up for Substack just now.
So please accept my apology. If there's a way to delete my comment, I'm happy to do that. Your work is thorough, and it's thoughtful.
Yikes! Or learn how to use Substack before commenting. I just finished signing up for Substack, and I stumbled across these comments. I went back and looked at the article, and it is excellent. I thought I had responded to something else entirely.
I don't think it's even the article I intended to comment upon. I don't know how I managed to do this, but this must be the most clueless and awkward start to Substack anyone has ever achieved.
Really enjoyed this post, do you have twitter or other social media I can follow? Thanks for writing this.
Thanks for reading! I do not do anything on social media, this is it for now.
Could you offer any background about yourself or would you prefer to stay totally anon. In which case I will thank you again for your writing and not bother you :)
I promise I am just a regular finance bro :)
🤝
No. This is mostly wrong. In every cartel, there is an incentive for each independent firm to cheat. That drives prices down.
We’ve seen this in OPEC and every other so-called cartel. In the 1970’s and 80’s, Saudi Arabia was the “enforcer” for OPEC. If they thought too many were “breaking the rules”, they pumped so much oil that they crushed the cheaters. That power didn’t last forever.
For any cartel, there must be an enforcer. This is also ignored.
The author ignores economies of scale, which lead to fewer producers. The author also ignores government participation in the market with subsidies - as in health and education. It’s these subsidies that drive up prices.
Worst of all, the author speaks of a wealth transfer from poor to rich when an innovative new product is priced for profit. That is Luddite thinking. *Everyone* is enriched by the new value created. The innovator may capture more of the newly created value than the author thinks is fair, but *nothing* is “transferred” from the poorer, who are in fact also enriched by the newly created value.
This is poor economics. Very poor.
Are you sure you're commenting on the right article? This is all covered!
On cheating:
Although it is theoretically possible for a group of firms to obtain monopoly profits by forming a cartel, one learns in an introductory economics class that this is difficult in practice because cartels are inherently unstable. There is a high temptation for any cartel member to cheat. By exceeding your quota, you can take advantage of high prices and unmet demand to make a lot of money.
In our widget example, perhaps instead of selling 700,000 widgets at $13, you sell the full million at $12.75. You would make $3.75 times one million instead of $4 times 700,000, that is $3.75 million instead of $2.8 million. The problem is, everyone will also realize that they should cheat and they will end up driving everything back to the competitive price of $10 and everyone will lose their monopoly profits. This tends to happen in real life, too; OPEC sets production quotas that smaller members sometimes violate.
On enforcement:
Returning to our original puzzle, it is clear that the secret to a successful cartel is to recruit the government to your side. The government can make anything legal. The government also will solve the other typical cartel problem, the temptation for members to cheat and undermine the whole enterprise. If violating a quota is actually illegal, enforcing compliance becomes much easier.
On government subsidies in health and education:
As a bonus, convince the public that the government should try to rectify the situation by offering subsidies to consumers. This will do nothing for affordability as long as it is not coupled with price controls, as the cartel has enough market power to raise prices to capture the subsidy. The net result is a new direct transfer of wealth from the government to cartel members, which is exactly what you want. This is a standard tactic you see in higher education, healthcare and housing.
On innovative new products:
It is now fashionable to be concerned about the monopoly power of Big Tech, and to have an opinion about Amazon’s private label efforts or Apple’s App Store policies. Big Tech is very visible, perhaps so much so that it is overrated as a threat. Big organizations like Amazon are easy to track and regulate. We are already predisposed to think of big corporations as an evil menace.
Cartels are effective precisely because they do not look like evil monopolies at all. The coastal homeowner campaigning against new development looks like your mother, and very well might actually be your mother. Doctors and schoolteachers are the healers and educators of society, not the enemy. None of them believe that they are advocating for policies that take from the poor and give to the rich; they are certain that the true problem with housing must lie with developers and investors, or that the true problem with health care must lie with administrators and CEOs.
This is what makes cartels more dangerous. The tech sector is actually quite small compared to housing and health care; none of the major tech companies have revenue much greater than $200 billion globally, while housing and health care reach into the multiple trillions of dollars per year in the U.S. alone.
What?! This was not a good start for me on Substack!
I think I did comment on the wrong article. I'm new to substack. I just signed in and saw these two responses. I saw a link to go to the original thread, and it was complletely different from what I had read previously. I was reading through it, thinking "I don't remember *any* of this. This is good stuff!
My original comment was from awhile ago, so I have no idea what I did. I was probably on my phone. I only completed my sign-up for Substack just now.
So please accept my apology. If there's a way to delete my comment, I'm happy to do that. Your work is thorough, and it's thoughtful.
You should consider reading articles before commenting on them :)
Yikes! Or learn how to use Substack before commenting. I just finished signing up for Substack, and I stumbled across these comments. I went back and looked at the article, and it is excellent. I thought I had responded to something else entirely.
I don't think it's even the article I intended to comment upon. I don't know how I managed to do this, but this must be the most clueless and awkward start to Substack anyone has ever achieved.