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)

See more: bargaining power, consumer surplus, contract enforcement, contracts, demand, dispute resolution, elasticity of supply, institutions, market power, monopsony, producer surplus, supply, transaction costs, willingness to pay, willingness to sell