The Microeconomics mischief

Yesterday’s best-written headline, which came courtesy (of course) of this paper, ran like so: “For unconsummated sex services, 2 tourists demand money back.”

In any transaction, there’s the eternal risk that the deal won’t get consummated…but in this case, we’re up against the literal sense of the term.

The story, you may recall, involved two Japanese gentlemen who claim for have forked over $150 each to some enterprising gals, who then split with the cash (as, ahem, opposed to for the cash). Three arrests were made; the two gals and an another alleged player in the reported scam.

After the event, the Japanese guys are said to have taken their grievances to the cops. I would have loved to have been a fly on that wall. If the desk sergeant didn’t get cramps from belly laughing at those two hapless dudes, he deserves a medal for diplomacy.

I would have had a female officer take the report, just for the pure sadistic joy of watching some kind of cross cultural gender freakout heaped on the two schmoes.

In these tough times, comic relief like this should be milked for all its value.

Beyond that, though, there is an element of profound economic truth at hand. Namely, the clunky workings of black markets. They are, in a word, inefficient. Hoods, hookers, and drug dealers may not have the Good Housekeeping seal of approval on their wares. The market suffers from a high level of what’s known as “information costs.”

Which means, to those who study such things in the abstract, that there are substantial profits to be made by players who can cheat their customers.

Which also means, as well, that the “better” suppliers in such markets will theoretically enjoy fierce loyalty from their satisfied clients. The cost of examining alternative suppliers is high to the consumer, since they must face the risks inherent in having high information costs.

So in terms of market theory, we’re up against a polarized supply side. Some suppliers will be rotten to their customers. Others, realizing the advantages of customer loyalty in such a treacherous market, will focus on providing high quality. The market will, then, for any given price, have a broad realm of quality for the good (or service) at issue, as the low quality suppliers and the high quality suppliers both seek to exploit opposite sides of the same “information costs” coin.

By contrast, in a free and efficient market, goods and services of similar prices are generally of similar quality. For example, a Big Mac, a Whopper, and a Wendy’s Single cost about the same, and are roughly the same in terms of quality. The transparent pricing allows customers to shift their purchasing behavior at will, which keeps the suppliers from straying too far from the average.

So there you have it: the contrasts between efficient markets, and inefficient ones…and why those rich Japanese widows tend to be so fiercely loyal to yours truly. Must be my sense of humor…

Ed Stephens, Jr. is an economist and columnist for the Saipan Tribune. “Ed4Saipan@yahoo.com”