Ben Keltner

Free Market Abuse and all the Good it can do

Among the most nave and idyllic fantasies the field of economics has

ever espoused is that of the invisible hand theory, as proposed by Adam

Smith. In essence this asserts that in a perfectly competitive market of self-

interested buyers and sellers, the most efficient allocation of resources will

be reached. Though an intriguing claim which is embedded with facets of

truth the fact of the matter is that there is not a market on earth which

adheres to the narrow parameters required for the this utopian scenario to

exist. Among these constraints which are so often broken are a complete

lack of eternities, everyone in the market to be perfectly well informed, and

perfectly competitive markets, the last of which entails its own veritable

plethora of stipulations and requirements which are almost as difficult to

satisfy in their own right.

Therefore it is safe to say that I was curious to see the market structure

and role played by the company Jones, Roach, and Caringella when I went to

intern there. After some time spent there I finally concluded that there firm

existed in a market which was monopolistically competitive, and that they

were among the most reputable firms in the market this in turn translating to

a limited portion of market power. In truth this is a somewhat simple

conclusion to arrive at when one considers the fact that they are in a market

with a relatively large number of firms with differentiated products and

reputation which fosters a slight inequity in the field. In addition to this due

to the fact that they must bid on auctioned contracts for work this practice

will inevitably favor firms whom are more well established and thus have

more disposal income to then further perpetuate this disparity. It should also

be noted that the aforementioned aspects of the market they exist in, also

provide marginal barriers to entry which are another proponent to the market

structure.

Now there is an important distinction to be made between the way

prices are set in a perfectly competative market and in a monopolistically

competative market structure. If one refers to graph 1.1 in the apendix they

will see the tipical supply and demand curves of a competative market with

the red line being the supply curve and the demand curve being the blue

line. The x-axis being the quantity of the good in the market and the y-axis

being the price of the good. In such a market the intersection of the two

lines would be the equalibrium price in which both the most efficient, and

socially optimal levels of supply and demand would be achieved. Contrary to

this when we look at the graph of the market of the monopolistically

competatively market we see a slightly diferent picture. Here the additional

green line represents the marginal revenue of the firm. Unlike a perfectly

competative market here firms in the market are far less bound by the other

firms and thus can assert prices which are potentially higher than there

competition as spured by either supperior quality of surivices or a lack of

information on the part of the buyers. For a true profit seeking monopolist
this would likely lead them to set prices which is vertically ajacent to the

point at which the marginal revenue curve intersects the supply curve, on

the demand curve. As one can likely guess this is neither the socially

optimal, nor efficient distribution of resources, however it is the profit

maximizing point for the firm setting the prices. Now due to the fact that the

firm Jones, Roach, and Caringella does not exist in a market where the have

unilateral market power they would not be able to this in such a drastic way

however my assumption would have been that they could do at least some

fraction of this. Because of there market power raising their prices above the

equalibrium price so as to gain more profit.

Now what some may view as a shocking partial solution to this issue is

price discrimination. From a vary young age we are taught that

discrimination in all its forms is bad, however with the exeption of monopoly,

it can function as a positive force. As one may be able to guess the the high

prices which monopolies are prone to set, there are large demographics

which are being neglected by whatever good the firm may be supplying.

Now as long as their reservation price is above the ATC or average total cost

curve as is shown with the green line of graph 1.3 it is profitable for the firm

it serve them, unless it forces the firm to charge the rest of their more

wealthy clients the same price. Thus we can now see how price

discrimination can serve a purpose. The truth of the matter is that we

encounter it far more than we realize in everyday. Though companies cannot

arbitrarily chose to charge some people more than others, measures such as
redeemable cupons which will appeal to only to those with lower incomes,

and different ticket prices for children and the elderly who may have less

disposable income, still constitute this type of discrimination; and as one can

see, this does not always entail a bad thing.

Interestingly enough the firm Jones, Roach, and Caringella is in a rather

unique position, in that if they chose to they could likely highly maximize

their profits by taking part in this type of price discrimination. Due to both

the ambiguity of what they do and the lack of expertise on the part of their

consumers it would be somewhat trivial for them to perfectly price

discriminate, based exclusively on the net worth of their client.

What perhaps surprised me the most in my internship was how they

used this advantage. In the study of economics you are taught to think of all

firms and companies as strictly profit seeking and rational players in a giant

game of chess. Eagar almost to spurn competition and public alike for even

minimal gains. What I found at Jones, Roach, and Caringella however was a

somewhat antithetical perspective which espoused a community based and

positive outlook on the world very much rooted in a what goes around comes

around mentality. In truth I found this a somewhat refreshing thing to see.

Perhaps most indicative of the atitude of the firm was a story which was told

to me by the name partner, Robert Caringella. In the story he talked about a

family who was having their home forclosed on in what he saw as unjust

curcumstances. As such he had his firm appraise the property for roughly
half of what his time was worth so as to accomidate for the limited income of

the family. In spite of the economic loss which was suffered by his company

this only goes to show the depth of the somewhat remarkable altruism which

is in many respects an embedded part of the company.

Appendix
Graph 1.1
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Graph 1.2

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Graph 1.3
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