There’s a fly in the facility and Walter doesn’t want to proceed until the fly is dealt with. Walter doesn’t want to contaminate the product in any way, but Jesse is confused because the customers don’t care about the quality of the product. If a small fly lands in the batch, Jesse believes it won’t be that big of a deal because the customers are highly inelastic. Jesse cites other examples of contamination in food (like hot dogs and candy bars) where people (and the government) don’t care about the quality.
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)
In an attempt to get Walt Jr to like him again, Walter tries to buy him a used car. Recognizing that his dad is trying to purchase his approval, he convinces his dad to buy him a new sports car instead. This clip shows Walter’s willingness to pay for his son’s happiness.
After a failed first attempt to gain full control over a key production input and get the blue methamphetamine off the market, Declan, a Phoenix-based dealer, meets with Jesse, Mike, and Walter. Right from the start, Walter tries and appears to succeed in convincing Declan that collaboration is the best path forward. This way, Walter’s superior blue methamphetamine remains in production and the methylamine, the key input, is used in the most efficient and profitable way. Further, Declan and his crew would serve as their distributor. This way the parties specialize according to their comparative advantage while all parties economize and gain from trade.
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.
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.
Walter has found a new friend in Gale and is surprised that a well-trained chemist decided to become a drug producer. The two of them aren’t the most obvious criminals. Gale believes his importance in the process is to help people get a clean product. Addicts will buy drugs without knowing what’s in them (asymmetric information), but at least Gale’s product is pure.
Now that Blue Sky (the methamphetamine cooked by Walter and Jesse) faces no other competition in the Albuquerque market, Walter realizes that the price of their product is too low. He goes on to add that, once the market is cornered, the price should be raised; “simple economics”.
The RV needs to be stored, and Jesse is hoping that the person who helped him tow the RV away before the DEA could find it would also be willing to let him store it on his property. The issue at hand is that Jesse had earlier stolen the RV and destroyed part of the property in the process. Jesse is hoping that they can come to a new agreement on storing the RV. As before, Jesse is in a bind and needs to store the RV. He doesn’t have time to shop around, so the tow operator has the upper hand in the negotiating process. When consumers don’t have a lot of time to shop around, their demand for services is often pretty inelastic.
After getting kicked out of his parents’ house, Jesse is on the hunt for a new apartment. After the potential landlord realizes Jesse doesn’t have a legal job, she raises the rent on the apartment. Part of her ability to do this comes from the fact that Jesse is a rental risk and she needs to be compensated for the additional risk she takes on from renting to someone without a legal job. Jesse’s demand is also pretty inelastic because he needs a place to live and there aren’t many places willing to lease to a person without a formal job.
The DEA is close to catching Jesse and Walter, which means Jesse needs to get the meth equipment out of his house fast. Badger knows a guy who owns a tow company and will tow away the RV, but it’s going to cost Jesse. This is a great example of inelastic demand for services. The DEA is close behind, and Jesse doesn’t have a lot of time to shop around for a better deal. The tow truck driver knows this, which is why he mentions the price is so high because of the cargo, not the miles. This means Jesse will need to pay a hefty sum to get his discrete services.
The Economics of Breaking Bad 