Monday, April 16, 2001

Week of 04/16/2001

Understanding The Marketplace Rules
- by David Matthews 2

"Whoever could make two ears of corn or two blades of grass to grow upon a spot of ground where only one grew before would deserve better of mankind and do more essential service to his country than the whole race of politicians put together." - Jonathan Swift

You know, it amazes me to see so many people be absolutely clueless about the nature of money, especially now, when the economy is not doing so well.

For instance, a few years ago, I had to serve as the jury foreman in a civil lawsuit involving an allegation of medical negligence. The hardest part in being that jury foreman was to get the members of the jury to NOT talk about financial damages unless we found the defendant negligent. At one particular point, members of the jury were ready to absolve the defendant, but still felt the plaintiff was due some money. I had to explain to them - repeatedly - that you cannot say that nobody is at fault and yet still award damages!

It makes you wonder, sometimes, if adults really DO believe that money grows on trees!

Let’s look at our growing problem we have in this country with energy. Here in Georgia, natural gas prices are going through the roof. In California, it’s electricity. And all across the United States, gasoline prices have been spiking in the past two weeks higher than Hugh Hefner’s libido on Viagra. Some predictions say that gas prices could very well break the $2 per gallon mark before the summer, and could quite well reach the $3 mark before the fall!

Now for those international fans out there, paying $3 per gallon for gas would be a sale. But here in America, paying that high a price is considered out-and-out price gouging.

But WHY the prices are getting so high is something that people have a hard time understanding. They’re very quick to write it all off as something evil or sinister, when people need to understand some very basic rules of the marketplace.

One of the first important rules in understanding the marketplace is that prices are not dictated by what is "fair" but by what people are willing to pay for that product.

Let’s look at the price of medicine. Ever wonder why pharmaceutical companies can charge $8-20 per tablet for medicine? Ask yourself who pays that bill to the pharmacy. Nine times out of ten, you don’t! The insurance companies do. They’re the ones that cut that check.. even if they do it grudgingly. They know as long as the insurance companies will cut that check, they can charge whatever price they deem to be "reasonable" for that product. How about all of those new and expensive devices and procedures? Why do you think the hospitals are able to charge astronomical fees? Because they know that the insurance companies will pay for them.

Let’s get brutally honest here.. when it comes to insurance companies, you are no longer the customer, because you’re not the one directly paying those bills! And thanks to the insurance companies, prices are so high now that it is almost impossible to be sick or injured and be properly treated unless you have some kind of insurance.

Let’s look at another example. How about the price of gasoline? If I owned the only gas station in town, I could charge $2 per gallon if I wanted to, and you’d pay it because IT IS the only gas station in town. Even if it only cost me $1 per gallon in overhead, I could still charge that extra dollar for profit and call it "reasonable." But if someone else opened another gas station just outside of town and charged $1.50 per gallon, you’d go there. So I could continue to charge $2 per gallon.. and potentially go out of business… or I could lower my price to $1.45 and get those customers back. When there is marketplace competition, I’m forced to limit my price to what the customer is willing to pay.

Here’s another important rule about the marketplace that people have a hard time understanding: Businesses always pass added costs to the customer!

Let’s go back to that gas station example. I’ve now dropped my price to $1.49 per gallon. It costs me $1 per gallon in all of the overhead involved with selling that gas. That’s a forty-nine cent per gallon profit. That’s a profit that can cover some of the other things I can sell at that gas station that may not make a profit, like coffee, or those cheap cassettes, or those magazines that continually put teen pop stars on their covers.

Now along comes the federal government, and they tell me that they want to raise the federal gas tax. And then my gas distributor comes to me and says that the state is forcing them to make the gasoline "cleaner" for the environment, so they’re going to charge me more money for them to put additives into that gas. And to top it all off, the town idiots tell me that they want to start charging a tax to pay for road repairs. All of that just jacked my overhead costs to $1.40 per gallon. Now, can I survive on a nine cent per gallon profit? Maybe, if the overhead doesn’t go up again. But I won’t be able to sell that coffee. And you can kiss those magazines good-bye too. Just wouldn’t be cost-effective.

Bear in mind, too, that the town tax would only apply to me, not my competition operating just outside of town. If I were to move my gas station out of town, I could save on that added cost. Or I can raise my prices to $1.60 per gallon and recoup a twenty cent per gallon cost. It would piss off a lot of customers, but there still would be a few people who would be willing to pay so they wouldn’t have to drive out of their way for cheaper gas.

Bear in mind that businesses must make a profit in order to survive. Just ask the dot-com businesses about that little reality. Oh yeah, it’s great to spend like there’s no tomorrow, but you’d better have a bottom line to back it up!

These are two very basic rules about business and the marketplace.. and these are the rules that spell out some of the aggravation we’ve been experiencing regarding the economy.

Let’s look at those gas prices again. Why are they going up? Because of overhead costs. The federal and state governments want the gas companies to produce "cleaner" gasoline. Guess who pays for that cost? Yup, we do!

Now, how can we keep those gas prices from going TOO high? Simple.. cut back on our gas use. The gas prices can only get higher if we continue to pay for it without changing OUR habits. Stop buying those gas guzzling sport utility vehicles. Stop planning on taking long trips across the nation simply for vacation. Dry-dock the bass boat for a season. It sucks, but as long as we continue to pay for the price of gas like it was two years ago without changing our habits, it only tells the gas companies that they can raise the prices even higher.

How about the energy crunches in California and Georgia? Ah! There’s a different problem! The problem there isn’t marketplace competition.. because the market is still dealing with a centralized government-endorsed supplier. This is the case in California with their electricity, and with Georgia with their natural gas.

Therein lies the real problem. It’s not the marketplace at fault, it’s the LACK of real marketplace competition, thanks to the government. But of course, the government doesn’t want to admit that.

When it comes to the marketplace, it really is the consumer that makes the ultimate choice that affect that market. We are the ones who create much of the problems when we forget that little reality, and we are the ones who resolve those problems when we retake our positions as consumers and stop trying to look towards government to solve our problems.

No comments: