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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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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Behavioral & Game Theory · Market Structures · Saul

Meth Lab in the Basement

Controversial lawyer Saul Goodman is trying to buy back Jesse’s house. Negotiations start and seem to unfold well until the parties disagree about the sale price. The couple ask for $875,000 but Saul’s client offers only $400,000. The couple and their counselor feel offended by such an offer and, while mentioning that the meeting was a complete waste of their time, start walking out of the room. They stop once Saul mentions the methamphetamine laboratory that used to be in the basement. This unpleasant, but key attribute is purposefully hidden from the buyer to keep up the value of the house. However, in this case, the prospective buyer seems to have done his homework. Unfortunately, in many of today’s transactions, the information held by sellers is not available to buyers and vice versa. In cases where such information gaps persist and are systematic, markets unravel and ultimately fail.

Also, note that upon introducing himself, one of the sellers immediately recognizes Saul as “the lawyer on late-night television.” This is because of his catch-phrase “Better Call Saul”, which is present in all ads involving his business. Differentiation is a key feature of markets in which many of today’s sellers and buyers interact. Together, these traits outline some characteristics of monopolistically competitive markets.

Finally, it is worth mentioning that Mr. Gardiner, the couple’s counselor, is ardent to get right to business. This leads Saul to remark, “I get it. Flat-fee clients, am I right?” This arrangement incentivizes Mr. Gardiner to service his clients as fast as possible and therefore maximize his hourly pay. The more time he spends with his clients, the lower his hourly pay (since it is a flat charge), and the higher his opportunity cost.

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

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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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