The news all over is that Amazon has cut the price of the Kindle from $259 to $189. By all accounts, this was prompted by the $60 price cut that Barnes & Noble gave the Nook ($259 to $199), which in turn was prompted by the low price of the Borders brand Kobo ($149). The availability of the iPad, an augmented substitute good for e-readers, will also potentially cause trouble, but the mere existence of the iPad doesn’t necessarily create downward price pressure in and of itself.

The Nook, Kindle, and Kobo are all extremely similar goods. I’d go so far as to say they’re perfect substitutes, if we consider this Kobo advertising table. Taking the American market, the price differential will disappear when the new price cuts take effect. The weight and thickness differences are negligible. The memory is similar. The only major difference is that the Kobo can use Bluetooth, while the Nook uses Wi-Fi and 3G, and the Kindle uses 3G. This difference is probably not going to result in significant market segmentation and no one will be likely to buy a Nook and a Kindle to take advantage of the Nook’s Wi-Fi capabilities, so it’s fair to consider these substitute goods with negative cross-elasticities of demand.

When prices for substitute goods with different producers move together, there are three options, two of which are sensible in a rational market:

1. The firms could be colluding.
2. The firms could be in a price war.
3. The price change could be coincidental.

Coincidence isn’t very likely or very interesting, so we’ll only consider options 1 and 2. Collusion is fun to consider, but probably not relevant here. For one, when prices move due to collusion, they generally move up because firms are no longer attempting to price each other out of the market. Tacit collusion might be the reason that about $200 is the floor for 3G devices, but it’s unlikely to be the reason both firms cut prices.

The price war would explain the fact that the changes in price are negative and that they’re meeting at a similar level. Price war means increased competition. Assuming demand doesn’t change (it will), the firm with the lower price will sell its product. Assuming demand increases as price decreases (it will), each lowering of price should bring additional marginal consumers to the pool of people willing to buy these devices, so while prices fall, profits may or may not increase. If profits increase, however, it will likely be profitable to cut the price even further, because additional consumers can still be reached, and there will be downward pressure from other firms trying to keep up. As a result, price will approach the cost of production. Price won’t reach the marginal cost of production, however, since there are barriers to entry into the e-reader market (including specialized equipment, R&D for a new device since the current devices are protected by patents and trade secrets, and acquisition of rights to books).

A quick rule of thumb to see if we’re dealing with price war or collusion is to check the stock prices of the producer companies. All things being equal, if a price move increases stock price, then the move is the result of anti-competitive measures like collusion, because there will be higher profits. If a price move decreases stock price, then the move is likely to increase competition and lower profits will result. Here, to quote KTTC:

Barnes&Noble shares fell 55 cents, or 3.2 percent, to finish trading at $16.52. Amazon shares declined $3.28, or 2.6 percent, to $122.55.

(Apple’s stock, for the record, ticked down today without much else to explain the drop.) This is probably a pro-competition move. The likely winners fall into two groups:

1. E-reader consumers, who will benefit from lower prices and more competition for amenities. The producers will likely be fighting for contracts with publishing houses, and a larger selection of books may be forthcoming.
2. iPad users. E-readers are an imperfect substitute for the iPad, so in order for the iPad to remain a rational choice after the price cuts, it will have to become a better product to avoid losing out to people who will get a better value by buying a cheaper product. This should mean more of a focus on the differential aspects of the iPad like the App Store, iTunes, and (yes) iBooks.

This should be fun to watch.

According to the MLB Players Association FAQ, about 12% of filed arbitration requests actually went to arbitration since 1990. From 1974 to 2006 (inclusive), the overall record was 269 arbitration decisions in favor of the club to 199 in favor of the player. Whether that represents better statistical methods by the clubs, players overvaluing their contributions systemically, an inefficiency on the part of the arbitrators, or simply more effective rent-seeking on the part of the clubs is difficult to determine.

The 88% of cases that were filed but not arbitrated since 1990 were settled – that is, either the player and the team came to an agreement or the player was otherwise disposed of (say, in a trade).

A very simple model of negotiation involving arbitration might work like this:

1. Player and agent prepare request.
2. Team prepares first offer.
3. Agent and team negotiate.
4. If the numbers are close, a compromise can be reached through negotiation with a given amount of transaction costs.
5. If not, further negotiation, with additional costs, can reach a compromise.
6. If no compromise can be reached, arbitration is filed with team offer T and player offer P; negotiations continue, with marginal transaction costs accruing. T is considered the minimum, and P represents a marginal increase. The expected salary value is T + [(P-T)/2].
7. Each side argues at arbitration, and a solution is reached which favors one side completely over the other. Thus, (P-T) is allocated entirely either to the player in salary or to the team in surplus.

Under File-and-Go arbitration, step 6 is truncated; there is no marginal cost of additional negotiation because negotiation is stopped. Otherwise, the marginal costs are similar to the standard arbitration strategy.

Edmonds points out that the two players who are in arbitration with Tampa Bay this year, Willy Aybar and Dioner Navarro, made offers that were very close to the team’s offer. My conjecture is that they understand that the team’s probability of winning arbitration is greater than the player’s, all else being equal, and have made an effort to come close to the team’s offer. Tampa Bay, meanwhile, does not seem to be extracting rent in the form of very low offers; thinking at the margin, one of the most efficient teams in the league will likely save $550,000 by making reasonable but low offers.

The arbitrators are also likely to rely on traditional statistics, rather than more recently developed sabermetric statistics. It would be interesting to see what kind of record the Red Sox and the As have in arbitration.

Navarro and Aybar are making a departure from the strategy of my second-favorite player, inept catcher Josh Paul, who employed the tactic known to the Greeks as “asking for way too much given his history.” Paul was offered salaries near the league minimum after being best known for failing to tag AJ Pierzynski in the 2005 ALCS. The play led to Chicago defeating Paul’s Angels; Chicago then went on to win the World Series. He asked, in both cases, for roughly double the league minimum and was denied both times.

Good-faith team offers
Rewarded by arbiters
Josh Paul is inept

In microeconomics as we know it, however, the market-clearing price of a widget is the point at which its supply curve intersects its demand curve – that is, the price where suppliers want to sell exactly as many widgets as customers want to buy. Price theory doesn’t take ethics into account. From the academic standpoint, it’s impossible for a price to be an undue inducement because price is based on the indifference point of the supplier.

Can a price be an unethical inducement to action? How can that be determined? Is it right, ethically, to set price controls under certain circumstances?

Here, BioEdge discusses the change to Singapore’s legislation:

Singapore is to allow compensation for kidney transplants and for eggs. A government proposal has been approved by a bioethics committee and legislation will be introduced early next year. The committee declared that reimbursement for kidney donation was acceptable as long as it is not “an undue inducement, nor amounting to organ trading”. … Other changes to Singapore’s legislation are contemplated: lifting the age of dead donors, which is now capped at 60 and allowing paired donation, in which a donor whose kidney is not a match for a relative, gives it to someone else, who also has a relative willing to give up a kidney.

I’d like to consider some of the ways in which this setup deviates from the theoretical perfect-competition model of supply, demand, and market-clearing price.

1. Most obviously, demand is perfectly inelastic. That may not be quite true, since a viable substitute good (dialysis) exists, but dialysis is both expensive and inconvenient. If the price of a kidney plus transplant was equal to the discounted present cost of continuing dialysis, I think it’s fair to say that the transplant would win every time. Bryan Caplan of Econlog agrees.
2. Supply, on the other hand, is more or less perfectly elastic. With rare exceptions, people are born with two functioning kidneys, of which, presuming they take care of themselves, they can function using only one. People have, presumably, a very high point of indifference for money versus kidney, but it exists for everyone. Therefore, supply will be entirely dependent on the government’s compensation limit.
3. Transaction costs are much higher than most goods. Black-market trade in organs to donate exists, of course, but to engage safely in a black-market kidney sale requires the cooperation of someone with at least some medical training.
4. Kidneys are not exactly fungible because of blood types, leading to a problem of double coincidence of wants. This is ameliorated in the law by allowing paired donation.
5. The government of Singapore isn’t interested in finding a fair price for kidneys. It does not want compensation to unduly influence the decision to donate an organ, nor to encourage organ trading. The problem with this position is that it doesn’t make sense. Given an enforced compensation of zero, a certain number of people are going to enter the market for kidneys for other reasons, generally in private transactions. The compensation in utility of giving a kidney to a friend or family member has, in the past, proven enough for some people; meanwhile, others will refuse.

The upshot of all of this is that there will be a substantial deadweight loss with regard to a perfectly competitive market, as in the case of any price ceiling with high transaction costs blocking a black-market escape hatch. The recipients will generate extra utility, of course, from their extended lifespans, and depending on the availability of kidneys on the black market currently, the compensation will likely induce additional organ donors to supply kidneys to the market. Since prices do not float freely, there will be no period in which prices are imperfectly determined, so those with an indifference point below the government-set price will derive additional producer surplus from selling their kidneys at above their minimum rate. Additionally, the effective price is slightly higher than the actual amount of compensation, because the government is providing long-term care, short-term life insurance, and priority status on organ donation lists.

The overall value can’t be determined without more information – the BioEdge article implies that the government will reimburse donors, but also states that the government will “allow” compensation. In the case of recipient payment, the utility gained will be offset by the payment, particularly if the price of a kidney is set and not allowed to vary. If the government behaves as a monopsony and acts as a broker for kidneys, then that cost will be spread across the taxpayers of Singapore, in which case the analysis is slightly more complicated.

As Caplan said, though, if I were on dialysis, I’d be booking my ticket right now.

Market created
Body’s filter may be sold
Elasticity

If you need a Canadian Politics fix, check out The Globe and Mail’s Opinion section. If you’re after an analysis of baseball until the numbers cry, try Recondite Baseball. For pure money talk, check out TwentiesMoneyMag. If you want a brief discussion of Radford, The Economic Organization of a P.O.W. Camp, 12 Economica (New) 189 (1945), you’ve come to the right place.

The article is freely available on J-STOR; the question cluster is here in handy-dandy PDF format. I’m just kind of grinding through the answers, most of which are fairly clear, to help organize my marginal notes.

1a. The equality of the distribution of supplies (in absolute terms) was essential to the economy arising as it did. Had the rations not included cigarettes and meat for all prisoners, there would have been little incentive to trade. The economy began as a pure barter system in which cigarettes were traded away by nonsmokers and beef was traded by Sikhs for anything else (page 191) but when it became clear that cigarettes and beef were more desirable than most other commodities the holders began to require more desirable items in trade, such as the Sikhs demanding jam and margarine in return for their beef.

1b. Supplies were distributed equally in absolute terms – each person received an equal ration of everything, being allowed cigarettes whether he smoked or not, receiving beef whether he was a vegetarian or not. Prisoners would be unhappy with their allotment in certain cases, especially in the case of the vegetarian receiving canned meat. The nutritional value of the packages was equal, but they presumably did not contain exactly the same food, since there was still an incentive to trade.

1c. The supplies could have been repackaged to make them more desirable to particular groups (for example, preparing specific packets for prisoners with dietary restrictions) or to allocate the cigarettes amongst only the smokers. The prisoners may have consered this facially equitable, especially in light of the public opinion (page 199) that held trade of relief goods to be undesirable. In fact, in lean times the prisoners debated whether nonsmokers should receive their cigarette ration (page 200). The Red Cross and prison authorities likely would have seen such an arrangement as inequitable because it would lead to commodities being distributed unequally. That is, more commodities would have accrued to particular prisoners, which would disadvantage the rest in terms of trade power.

2a. The barter system evolved from the fact that differenbt prisoners valued different goods at different levels. Some prisoners did not want particular goods which were desirable to other prisoners; trade occurred to maximize each prisoner’s utility by allowing him to optimize the personal values of his goods.

2b. The cigarette currency emerged because cigarettes are portable, fungible, nonperishable, and rationed to each prisoner in equal amounts. Since cigarettes are small and of low value individually, they are ideal – the fact that a good sold for relatively many of them (20 for salmon, for example [page 192]) provided a granularity of value. If prices had been quoted in terms of canned salmon, for example, nothing worth less than one can of salmon could be easily bought and sold without opening the can and subdividing the food inside. The addictive nature of cigarettes probably lubricated trade by increasing the urgency that some prisoners felt to acquire them. Had cigarettes not been rationed, I think it is likely that individual servings of tea or coffee would have been used instead for the above reasons -a single teabag not only contains addictive caffeine but is relatively portable and one teabag is just as good as another.

2c. The exchange system reacted nimbly to different outside effects. The large amount of information available through the exchange board (page 191) was probably responsible for the market operating as efficiently as it did. When bread became readily available from an outside source in exchange for lower-value chocolate, the prices tended toward equalizing (page 196). In addition, prices fluctuated throughout the week (e.g. page 194), showing the efficiency of the market as it reacted to supply and demand changes. Untapped markets were quickly opened, as in the case of an Urdu-speaking prisoner who opened trade with the Sikhs by buying their meat (page 193), effectively flooding the non-Sikh market, but prices quickly adjusted. Arbitrage was rampant (page 191; 193; 196), allowing prisoners to use the leverage of time to maximize their wealth.

Unforeseen events, such as rations being halved and the camp being bombed, affected the prisoners’ preset values in artificial paper money (page 197). The change in relative values caused the Bully Mark to lose its value against the cigarette and eventually it was valuable only for undesirable food products. Thus, the cigarette currency’s relatively low value and ability to float freely was essential to the economy’s smooth operation.

2d. The people who gained as a result of unforeseen developments tended to be people with special skills or creativity – the Urdu-speaking officer, for example, or the people who bought chocolate to trade with the German bread vendor. In addition, officers who received private cigarette parcels (page 195) were at a distinct advantage when the Red Cross rations were interrupted. This is analogous to endowment income in the US economy.