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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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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Foundations · Labor · Supply and Demand · Walter

Truck for Cash

Walter drives to the desert to hide the cash generated by his methamphetamine enterprise but he runs out of gas. As he rolls one of the money-full barrels, he comes by a house and asks to buy the truck sitting in the driveway. Initially, the truck is not for sale but after he offers the man a large stack of money this changes. Next, we see Walter load the barrel in the back of the recently purchased vehicle. Each person/business has a reservation price at which they’re willing to sell products or services. For this lucky resident, it appears $10,000 was at or above his reservation price. If his reservation price was lower than $10,000 then he would hear producer surplus.

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Behavioral & Game Theory · Labor · Walter

What About the Money?

Ed visits and cares for Walter. As Ed prepares to leave, Walter offers him $10,000 to stick around for two more hours. Ed takes the offer but only for one hour and the two start playing cards. Based on the earlier exchange, Ed’s reservation price for each hour is above $5,000 but below $10,000.

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