We are belatedly watching The Wire, nearing the end of Season V. [N.B.: see Sudhir Venkatesh's series of blog posts called "What Do Real Thugs Think of The Wire?"] By Episode 6, Marlo Stanfield has killed off the competing retail drug lords and also the chief wholesaler, Proposition Joe. At the next meeting of Baltimore drug lords, Marlo allocates territories among his subordinates and announces to everyone a large rise in the wholesale price of drugs. Not surprising—he has turned an oligopoly into a monopoly, with him as the monopolist.
Marlo doesn’t realize it yet, but his monopoly status gives others a bigger incentive to attack him. Don’t spoil the suspense for me, but I wouldn’t be surprised, although I would be pleased, if Marlo is bumped off by his own subordinates—it’s hard to maintain monopoly power.
A student writes that she became a monopolist in her freshman dorm — hoarding Midol to sell to her dorm-mates at the time each month when dorm-mate had a quite inelastic demand for this product. She also realized that at that time, there is an increasingly inelastic demand for chocolate-chip cookies, so she hoarded and sold those, too. She correctly notes that the two goods are complementary over time — more of both consumed on some days than on others. But I bet that over a short interval, they are substitutes — the satisfaction from one reduces the demand for the other. This illustrates how we need to think about the time dimension of consumer choice. I would also bet that her monopoly doesn’t last long. Anybody can bring the two products to the dorm and sell them — there are few barriers to entry. A better description is that she’s an innovating entrepreneur in what inherently will be a competitive industry.
My good friend Massimo Young recently moved to Kenya, where he is seeing what happens when you mix a little American ingenuity into a thriving but chaotic developing economy. In what I hope is the first of many blog posts, Massimo reports on just what it takes to succeed in the banking industry in Kenya. (Massimo does not have a financial interest in any of the companies discussed in his post, although he wishes he did!)
M-PESA: The Story of the Most Successful Bank in Kenya
By Massimo Young
It’s not easy to do business in Kenya. Business people complain all the time that despite a wealth of opportunities, there are often major roadblocks to accomplishing much on the ground, especially at scale. In fact, Kenya ranks 121st out of 185 countries in the World Bank’s “Ease of Doing Business” survey.
On the other hand, there are some amazing examples in recent years of businesses that have managed to accomplish a lot very quickly. In particular, the wild success of mobile banking in Kenya has changed the way people use money here. Launched just 5 years ago, Kenya’s leading mobile money transfer service, M-PESA, now processes a total of about $5 billion in transactions per year, equivalent to an astounding 15% of the country’s GDP. Before it launched, only 14% of Kenyans participated in the formal banking sector. Today, about half the adult population uses M-PESA. Read More »
More than 25 per cent of trade between the U.S. and Canada goes over the Ambassador Bridge between Detroit and Windsor, Ontario. The bridge, built in 1929, has since 1979 been owned by one individual — Matty Moroun. He also owns duty-free stores and sells gasoline that escapes taxes. The Bridge isn’t quite a monopoly—there is also a tunnel; but the Bridge is more convenient for a lot of traffic.
Michigan has a constitutional amendment on the ballot requiring that any new bridge be approved by voters before state money is spent on it. Perhaps unsurprisingly, the Bridge owner is funding a large advertising campaign supporting the amendment. No monopolist likes to have the stream of monopoly profits diminished, which a new bridge would surely do. His political advertising is a smart move for him—a good way to ensure a continuing flow of profits. Whether it’s good for Michigan, for U.S.-Canada trade and the well-being of the average North American consumer is questionable. (HT to DJH)
As a teen Max had a great business mowing lawns. He used his hand-pushed power mower to build up a large clientele in a radius of his family’s house. When his friend and neighbor Charlie entered the business, ending Max’s local monopoly, Max didn’t have to cut his price—Charlie just expanded the radius of the client area.
Max knew he had problems, however, when he saw Charlie drive out of his garage on a riding mower. Charlie could now do four times as many lawns/day as Max. Max started losing customers when Charlie cut prices, as he could afford to (because his average cost/lawn was lower than Max’s and had a minimum with a higher output.) Not wanting to compete on price, and unable to get his parents to buy a riding mower, Max decided his opportunity cost was above his now lower lawn-mowing wage, and he quit the business to open a lemonade stand. (HT to MF)
We inherited several art works, including a Rembrandt etching—a portrait of an old man. Is it worth anything?? An art appraiser/detective hunted down its story. The print itself is new—pulled on highest-quality paper in the 1990s from Rembrandt’s plates. Apparently no prints were made in most of the 20th century. In the 1990s the plate’s owner pulled a small number, but none since, and none planned.
The owner has a monopoly on the plate and understands revenue maximization (there are essentially no variable costs): Pull just enough prints to have sufficient quantity to drive the price elasticity of demand to unity, but no more than that. Not only does his strategy gain him the most revenue, but it keeps the price of our print up in case we decide to sell it. This is a rare case where I benefit from monopoly!
In the movie District 9, the aliens (“prawns”) have developed a tremendous addiction to cat food. A Nigerian gangster lives in the prawns’ preserve and has a monopoly on the sale of cat food to the prawns. How can he maintain his monopoly and what barriers are there to entry by other sellers? Read More »
Photo: orangeacid I have been playing Monopoly since before 1950. Aside from the fun, it provides one of the best ways to introduce the idea of marginal to an intro economics class; and because I’m not teaching my giant section of intro microeconomics this year (the first time since 1980/1981), I miss both teaching and […] Read More »