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Enron Mail |
As I had a little difficulty expressing my concerns today, I thought that I might offer you a little parable. One day, an enterprising young boy named Bubba decided to start a lemonade stand in front of his house so that he could afford to buy a GI Joe with the kung fu grip. He set up a table, painted a sign that read "Lemonade 25 cents", and began to squeeze lemons. Bubba discovered that he could squeeze enough lemons for about 10 glasses of lemonade each hour. Bubba had a bothersome little five year old brother named Scooter. Although annoying to Bubba, Scooter loved to do whatever Bubba was doing and decided to set up another lemonade stand right next to his brother's stand. Scooter was not as strong as Bubba and could only squeeze enough lemonade for about 8 glasses each hour. Scooter also painted a sign that read "Lemonade 25 cents". Initially, the two boys could sell about 8 glasses of lemonade each hour between the two of them, but as the weather got hotter they attracted more and more thirsty customers. Eventually, they were selling about 15 glasses of lemonade each hour.* As it got hotter and baseball season began, the boys grew less interested in their stands and the GI Joe with the kung fu grip was not getting any closer. Then, Bubba got an idea. if he raised his price to 30 cents a glass, he would make a lot more money. The customers at first would buy their lemonade from Scooter but when he ran out they would buy it from Bubba. This worked great for Bubba but Scooter did not like his brother making more money for the same lemonade. Because he liked to do whatever his brother was doing, and because he also had his mind set on buying a three foot plastic alligator with the remote action chompers and realistic sounds, he too raised his price by 5 cents. Regardless of the new higher price, the customers kept coming. "Hey, this is great" the two brothers thought to themselves. But then, the good times came to a halt. Bubba's mom discovered that he was charging 30 cents for a glass of lemonade and she ordered him to drop his price back to 25 cents (but not before she bored him about how lemonade had only cost a nickel in her day)**. Interestingly, she must have forgotten to tell Scooter to do the same (Bubba always suspected that she liked Scooter better anyway). So, Bubba hatched a new plan. If he could get Scooter to sell his lemonade for him, he could still receive the higher price the customers were paying***. Thus, Bubba began making lemonade for Scooter's stand. Bubba kept his stand open but he never had any lemonade to sell. Soon a long line set up in front of Bubba's stand, all eager to buy out his cheaper lemonade. But some of the kids became frustrated and angry when Bubba was not selling any lemonade at his mom's ordered price. Buzzer, the neighborhood snitch, told Bubba's mother what he was doing and she was not pleased. She told Bubba "young man, I want you to go out there and sell lemonade for 25 cents to whoever asks for it, or else"! Fearing for his young life, and knowing that he could not possibly squeeze enough lemons to make all 15 glasses, Bubba made Scooter an "offer he could not refuse". He told Scooter that he was taking the unsold lemonade from Scooter's stand and would pay him only 20 cents****. Then, Bubba could sell Scooter's lemonade to the thirsty crowd and still meet the demand while staying out of mom's dog house. Unfortunately, Scooter realized that this was more hassle than he had expected and went inside to play Nintendo leaving Bubba with the angry crowd and not enough lemonade to sell. * Bubba has now become a pivotal supplier of lemonade. ** Bubba's mom has just intervened in his market with a price adjustment. *** Bubba moves his supply to the unrestrained market. **** Scooter's lemonade has just been OOMed. Whenever two markets are perfect substitutes for each other, market forces will bring the prices into equilibrium through the execution of arbitrage opportunities. Yet, when the price in one of the two markets is artificially managed, this equilibrium cannot exist. It would be expected that the market that is price managed will attract more buyers but less suppliers. If suppliers are not forced to participate in the price managed market, then they will shift their supply to the market without price controls and buyers will have to follow. This would mark the end of the price controlled market leaving only one market remaining. On the other hand, if the price controlled market also can force suppliers to deliver into its market, then the buyers would not have to follow the supply. In fact, in this case, more buyers would shift to the price controlled market if it was perceived to deliver lower prices than the free market. In this case, demand dries up in the free market and suppliers are forced into the price managed market. Yet, suppliers must be paid for this forced sale and a regulated price is developed to accomplish a fair compensation. Thus, relieving us all of the complexities of this thing called competition. Brad
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