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Source link: http://archive.mises.org/6794/forget-price-floors-can-we-have-an-ignorance-floor/

Forget price floors. Can we have an “ignorance floor”?

June 29, 2007 by

I frequently come across writings on economic issues that make me think, “If I wrote that, the people who taught me economics would slap me upside the head.” That crossed my mind as I read about the Supreme Court wrestling with the question: Are price floors good or bad? The NYTimes article on the SC decision presents it as a binary choice:either the court must decide that price floors are unequivocally “bad”, or courts must examine every case of every business from now until the end of time, deciding which price agreements are “good” and which are “bad”. When economic questions come before a court, they are treated as simplistic, good or bad, fair or unfair, with one magic answer a court can hand down from on high. On the other hand, this analysis of the Supreme Court’s price floor decision is spot on: What newspaper reporters, Supreme Court justices, and countless others don’t understand is that those decisions can’t be made in some esoteric environment, divorced from the real world in which consumers make choice and entrepreneurs respond to them. Just an example: I am acquainted with a small business that deals a product that can also be widely found through internet retailers. Their niche is providing in-depth knowledge of the different brands and personalized customer service, including repairs and upgrades of their products. Their competitors include so-called “drop ship” businesses. These are basically individuals, usually doing business over the internet, who take orders for a product from customers, then order the product from the company and have it shipped to the customer. In this way, they become dealers with very small overhead costs, allowing them to sell for lower prices than a brick-and-mortar business providing individualized advice and customer service both before and after the sale. If companies that make the product wish to support dealers who offer product knowledge and personalized service, one way to do that is through minimum pricing. The manufacturers are making a choice to have dealers of their products who compete on service, and entrepreneurs take advantage of that by selling both the product and the personalized service together. Other manufacturers can and do choose to let their dealers compete solely on price, doing volume sales to large retailers who can sell close to cost. These are not mutually exclusive; they can exist simultaneously in the market.
It’s a choice of a business model, and only the decisions that consumers make can tell us if it’s the right or wrong choice. Can price floors raise the cost of goods? Perhaps. But if they do, consumers are perfectly capable of punishing the businesses that do that. If consumers don’t care about customer service, the businesses that use price floors as I described will find out, without the intervention of any court, that they made the wrong choice. Whether price floors benefit consumers or not depends on the time, the place, the product, the customer, and a host of other factors that no judge or antitrust bureaucrat can know. Lawyers, judges, and “consumer advocates” are not behind the counter day after day, trying to figure out what customers want so that they can keep their business afloat. Entrepreneurs are, and they are part of an amazing system that does not need the wisdom of judges and central planners to tell them whether consumers benefit from their business models or not.

{ 7 comments }

CRC June 29, 2007 at 12:14 pm

Perhaps the more important question that the Supreme Court ought to be wrestling with is the one of liberty and freedom, rather than the economic effects or impacts.

That they are wrestling with the question at that level reeks of a “pragmatism” that permeates their decision making rather than a core set of principles (liberty among them) as a foundation for their decision-making. I see evidence of this “pragmatism” in the “Bong Hits 4 Jesus” case where the pragmatism of school authority and control won out over the rights of an adult exercising speech on public property.

Working from core principles (hopefully including liberty) would suggest that both of these cases are “slam dunk” decisions. That the government has no compelling right or reason to abridge the freedom of a person (or group of people) to set the prices of their own goods and services nor to abridge the right of an adult to speak unpopular things.

Neither of these actions can be reasonable construed as using force, violence, coercion or fraud against another person or group and that ought to be another core principle they decide from.

But that’s just me I guess.

Robert Brazil June 29, 2007 at 12:53 pm

Isn’t the Supreme Court supposed to be judging constitutionality, rather than deciding whether or not this or that activity should be permitted based on the judges’ personal opinions (which are necessarily based on ignorance in most cases)? Judges are not required to be experts in economics but they should know the U.S. Constitution.

It seems that most of the cases the court takes on could be dealt with in five minutes by simply reciting the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”

However, to do so would be to suggest that Supreme Court justices are not omniscient demigods, and this might be damaging to their egos.

On a related note, “precedent” and “Constitutional law” are often just code for, “We don’t have to come up with any tortured, legalistic excuse for this unconstitutional, federal power grab — because someone else already did the heavy lifting for us!”

Bill, always amazed. June 29, 2007 at 8:47 pm

This is amazing. The dissent (4 of 5) judges reasoning from the NYT was that just because there was 100 years of precedent then it is ok? Why rock the boat?
The other amazing thing is the majority in this case was interested in preserving or creating competition.

The most amazing part is that NONE OF THE JUDGES SEEMED TO THINK THAT THE PROPERTY OF THE MANUFACTURER MATTERS! What matters is competition or more competition or preventing monopoly?

This is a good ruling and a correct one but our Constitution is under attack from the very people who are supposed to protect it.

Ohhh Henry July 3, 2007 at 12:23 pm

they become dealers with very small overhead costs, allowing them to sell for lower prices than a brick-and-mortar business providing individualized advice and customer service both before and after the sale.

A great disadvantage of brick-and-mortar businesses is that the very existence of the bricks and mortar and the shingle on the front is interpreted as an invitation to be plundered by local tax and regulatory authorities. Commercial property taxes, building permits, business license fees, random and arbitrary inspections and fines, nuisance lawsuits for infractions such as not serving or hiring ethnic groups equitably, etc., etc. are the fate of anyone bold or foolish enough to operate a business right out in the open. No wonder they can’t compete on price.

casto September 7, 2008 at 11:01 am

However, to do so would be to suggest that Supreme Court justices are not omniscient demigods, and this might be damaging to their egos.

Shazia January 27, 2009 at 6:50 am

It was your blog that encouraged me to start blogging and yours is still one that I return to again and again. Thank you!

DropShip July 31, 2010 at 2:51 pm

Of all drop shipping suppliers I’ve worked with, all of them gave volume discounts, which made competing with online difficult, there will always be somebody willing to sacrifice profits to beat out the competition on price. I watch eBay from time to time, and it takes about 2-4 weeks for a new product to enter, then get copied by all the other sellers, and then priced down so low nobody makes any money.

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