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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Gus · Market Structures · Walter

Controlling the Market

Gus is set on controlling the market for meth in the Southwest. He has worked hard to eliminate the local drug cartel so that he can be the sole supplier. Being the only supplier of a product gives a firm market power to charge prices greater than marginal cost. While profit maximization still occurs where marginal cost equals marginal revenue, a firm with market power is able to charge a markup on top of the marginal cost. Further, the markup is inversely proportional with the price elasticity of demand coefficient (i.e. the more inelastic the demand, the higher the markup). As the number of substitutes (competitors) decreases, the demand for each firm becomes more inelastic, which, in turn allows the firm to charger higher prices.

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Government Intervention · Skyler · Walter

Money Laundering

Skyler starts doing the books for Walter’s drug income and is ready to learn how the money gets laundered. She doesn’t think Saul’s setup is legitimate enough to get past the IRS so she wants to talk to him directly. It turns out that Saul’s ideas seem ludicrous to her. One unintended consequence of policies that outlaw the production/distribution/consumption of drugs is the creation of money-laundering operations such as “Ice Station Zebra Associates”. Walter uses this “company” to launder the money he earns from manufacturing methamphetamine.

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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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Market Structures

Bulk Discount

An illegal arms dealer is selling the criminal twins some bullet-proof vests. As other entrepreneurs, his profit-maximization incentives push him to offer bulk discounts on guns. Bulk discounts are a popular form of price discrimination to incentivize buyers to purchase more products than they may have originally intended.

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Jesse · Market Structures · Walter

Corner the Market

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”.

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Jesse · Market Structures · Walter

No More Chili P(owder)

This clip shows Walter’s preference for producing superior products. In an inspired scene, Walter states: “You and I will not make garbage products. We will produce a chemically pure and stable product. One that performs as advertised. No adulterants. No baby formula. No chili powder.”

Why should Walter care about how his product performs? Why should product quality matter, especially when traded in a black market characterized by a relatively inelastic demand?

Product differentiation and quality, customer satisfaction, monopolistic competition, and market power can be discussed using this scene. As the show progresses, for example, viewers learn that Walter’s product is the best in the market, highly sought after, and blue. This last characteristic is especially important when learning about the white-colored competing methamphetamine. Product characteristics shape its substitutability and determine the elasticity of its demand or why brand products are often priced differently from generic products.

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

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