Limitations On Bargaining Power, Are The Primary Reasons For The Low Price Paid For Unskilled Labor
DavidGrace
101

You use many theoretical examples to make your points and I understand this is a great teaching technique. Unfortunately for your argument the perimeters you set do not reflect reality in the vast, bast majority of market conditions.

GLOBAL COMPETITION DESTROYS CARTELS

1. You ignore the fact that buyers are not limited by geography for most goods and even many services. Unless legislation or regulation limits market entry this destroys the ability for sellers to maintain a cartel.

INNOVATION

2. The main driver of cost reduction is innovation. The competitor that finds a way to reduce the cost of production, distribution, sales and marketing can reduce cost slightly and capture huge market share and high profits. Or they can go the other direction and increase quality, as perceived by customers. This can allow them to increase price, capture more market share or both.

This destroys your fair price model by the way. Starbucks dramatically increased the price people were willing to pay for a cup of coffee. Yes the production cost per cup did increase, but the price increased much more. Yet customers were very willing to pay it despite many cheaper alternatives.

UNIONS

Unions have a very short half life. They face the same competitive pressures as cartels. Global competition and innovation will destroy them UNLESS they manage to transform themselves into a competitive advantage to the employer.

PATENTS

The real world examples you give reflect the need to reform the patent system. The patent system is not a natural market feature, but something imposed by governments to reward innovation.

CEO PAY

The increase in CEO pay is primarily driven by the use of stock options. The business assumption around paying stock options is that the only way for CEOs to drive up share prices long enough to cash out is by making the firm more profitable. Many people, including shareholders, are starting to question this model. Over time firms will try other options. If those options drive growth they will gradually be adopted across industries. In the mean time CEO pay impacts no one but shareholders.

MARKET PERFECTION

Markets generated pricing is not perfect at any point in time, but over time it takes into account the variables of consumer preference, scarcity, changes in input prices and impacts of innovation that government generated pricing never could and “fair” prices need to take all of these variables into account.

SMV

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