Tuesday, October 27, 2009

A Quick Thought

Today someone asked how economic can be a field where the same data results in two totally different theories. The answer is that economic systems are ultimately based on individuals, and not all will act rationally and in their own self interest. In a perfect world, everyone would be a profit maximizer who did all of their actions to maximize benefit compared to cost, however that is not true for societies of millions upon millions of people. People become swayed by emotion, confuse short term and long term goals, and make decisions with the interests of others in mind. Since these actions are a part of human behavior, economic models must deal with such variables and there is a discord between the theoretical and the practical.

Thursday, October 8, 2009

A Seedy Business Perhaps?

Browsing through the financial stories today I came across a particularly interesting storyi nvolving the largest US seed manufacturer, Monsanto. The United States DOJ is investigating whether their use of patented seed results in antitrust by having users controlled by the seed supplier. For example, the soybean crop in the United States uses 96% Monsanto seeds, so anyone wishing to produce the crop is pretty much reliant on a single supplier. This is called monopsony.

Monopsony is the same principle as a monopoly, but reflecting a single buyer(IE inelasticity in the supply curve) versus the single seller (inelasticity in the demand curve) of a monopoly. Frequently monopsonies arise from issue where government is the sole buyer, such as a universal healthcare system, research funding, and in analysis of labor markets for welfare economics. One example of a monospony would be the labor market in a small town with one major ocmpany, say a Wal-Mart or a mine, for instance. Since the single employer has no outside competition, since there is no store which can compete with the company becuase there is some economic factor preventing competition, the employer can charge below market wages since they have price-making power. This difference in wage at the the output level of the monopsonist is exploitation, since a free(completely competitive) economy would pay a worker W(higher) while the wage taker pays (W(monopsony). In other words, by controlling the ability to hire in a market, the monopsonist firm get more money out of each worker since they know the worker cannot easily leave the market.

If you want to read through an econometric research paper on the topic which reaches the conclusion that Wal-Mart is a monopsonist in rural areas and in the South, while having reducing monopsony power in areas where they facor labor criticisms and competition on the West Coast and Northeast, here it is courtesy of the University of Connecticut.