Jesse · Market Structures · Saul · Walter

Cooking Again

Back in the office of Saul Goodman, Walter and Jesse try to sort out some of their recent misunderstandings. In the process, Jesse finds out that Walter is soon to start producing methamphetamine without him and under the employment of their associate, Gus Fring. When Walter is asked about how much he stands to gain from this new partnership, he simply responds, “It is $3 million, for three months of my time.” Saul knows that this large amount of money needs to be laundered and immediately offers his services for a 15% fee. However, as a prospective customer for money-laundering services, Walter is well aware of his bargaining power and quickly counters Saul’s offer with a 5% fee. Saul attempts to negotiate a high-enough fee by sequentially proposing 14%, 13%, 12%, and 10% fees. In each scenario, Walter’s response is unchanged, “5%”. Single buyers, or monopsonists, have the market power to reduce the acquisition price, just as a monopolist has the market power to limit the quantity supplied and therefore increase market price to maximize profits.

This video clip is also instructive about the price elasticity of supply. More specifically, the video clip emphasizes Saul’s perfectly inelastic supply for money-laundering services over the observed range of prices (i.e., 5% to 15%). Despite the fact that the laundering fee (the price Saul receives) is adjusted from 15%, 14%, 13%, 12%, to 10%, and finally to 5%, Saul is still willing to supply his services. The negotiation between Walter and Saul also reveals some information about Saul’s “willingness to supply”, which seems to be somewhere under or at the 5% threshold. This is simply because even at 5%, Saul accepts the proposal.

Finally yet importantly, the dialogue between Jesse and Walter, located the end of the episode and included below, may be used to frame a discussion about contracts, contract enforcement, and the role of institutions in shaping the behavior of economic agents. Jesse: “You think that this will stop me from cooking?” Walter: “Cook whatever you like. As long as it’s that ridiculous Chili P or some other dreck … but don’t even think about using my formula.” Jesse: “Just try and stop me!” While Walter is indeed the one who discovered the formula for the “blue” methamphetamine, he might have a hard time preventing Jesse from using the same formula to produce a similar good. Had this formula involved any other legal product, such a dispute would have been prevented by the filing of a patent or by a contract regarding its use, both enforceable through a functioning judicial system. However, the use of institutions as a dispute-settling mechanism is not possible in this case – methamphetamine is an illegal good, produced and consumed within a black market. Consequently, violence and the use of force tend to replace institutions in solving such issues, a substitution that generates significant external costs to society.

This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)

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Supply and Demand · Walter · Walter Jr.

Fifty Dollar Car

After having the family car repaired at a local maintenance shop, Walt decides its time to get rid of it. He’s worried that his car is too easily recognized and offers to sell it to the shopkeeper for $50. While Walt Jr. finds this crazy, Walter is willing to get rid of it even if it’s well below what he could get somewhere else.

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Gus · Supply and Demand

Almost Pure

Gale is asked to test the purity of Walt’s meth and finds that it’s 99% pure, while he can only produce a version that is 96% pure. From Fring’s standpoint, 96% is good enough, but Gale is impressed that another chemist can achieve a 99% purity level. It is apparent that Gus weighs the costs and benefits of producing 99%- or 96%- pure methamphetamine. After all, the equipment he just purchased is suited for producing both purities, which makes the two varieties substitutes in production. Nevertheless, Gus decides that a purity of 96% will suffice. From his perspective, the cost of working with Walter, who is regarded as unprofessional, outweighs the 3-percentage points increase in the purity of the drug. However, Gus’ methamphetamine, although 96% pure, is inferior to that of Walter and the logic of the Alchain-Allen theorem tells us that he might be losing out as long as it competes with the “blue” drug. In other words, the Alchian-Allen theorem states that, when the same transportation, distribution, tax, or sale-specific markup is added to the prices of two similar varieties of the same product, the relative consumption of the higher quality good will increase. Since from a legal perspective, the risks and costs of distributing methamphetamine are, more or less, the same, regardless of its purity, a relatively larger market share will be accounted by Walter’s “blue” methamphetamine. The scenes within the video clip are also useful for discussing product differentiation as a key characteristic of monopolistically competitive markets. The blue color of Walter’s methamphetamine represents a signal of quality as well as purity that bridges the seller- buyer information gap, a problem that plagues black markets such as those for drugs and other illicit goods or services.

This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)

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Jesse · Market Structures · Mike

The Whole Market

Mike and Jesse attempt to get out o

Mike and Jesse attempt to get out of the business of producing the blue methamphetamine. In doing so, they attempt to sell their share of the methylamine, a key input in the production of methamphetamine, to Declan, a competitor from Phoenix. However, the Phoenix producer wants it all, theirs and Walter’s. This way he can control the entire market for methamphetamine. Because he knows that he can reproduce a similar product, he recognizes that having all thousand gallons would make it so that Walter couldn’t be competition in the market. Having control of the market will give this producer monopoly power, which will allow him to be even more profitable. Controlling a scarce resources is a common way that monopolies create barriers to entry in a market, resulting in the market power.

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Macroeconomics · Supply and Demand · Trade · Walter

Demand for Meth in the Czech Republic

Lydia presents Walter with the opportunity of expanding into a new market (the Czech Republic). Lydia goes further and points out that entry should not be difficult given Walter’s high-purity “blue” methamphetamine and the inferior alternatives available there. Also, it is worth noting that such overseas expansion would not have been possible without Lydia’s expertise regarding global supply chains.

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Supply and Demand

Blue Quality

Todd cooks a methamphetamine batch of only 76% purity and not the distinct blue color expected by European customers. Lydia comments that consumers expect the “blue”, which is a signal of quality and purity, and will pay top dollar only for it. So while even though they are getting better, they aren’t as good as Walter’s blue meth. The blue coloring is important to signal to the European market that the product is high quality (even though it isn’t). If customers believe the meth is the same, they will pay top dollar for the product. Lydia recognizes that without the color, her profits are about to fall.

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