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Forget price floors. Can we have an "ignorance floor"?

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06/29/2007
I frequently come across writings on economic issues that make me think, "If I wrote that, the people who taught me economics would slap me upside the head." That crossed my mind as I read about the Supreme Court wrestling with the question: Are price floors good or bad? The NYTimes article on the SC decision presents it as a binary choice:either the court must decide that price floors are unequivocally "bad", or courts must examine every case of every business from now until the end of time, deciding which price agreements are "good" and which are "bad". When economic questions come before a court, they are treated as simplistic, good or bad, fair or unfair, with one magic answer a court can hand down from on high. On the other hand, this analysis of the Supreme Court's price floor decision is spot on: What newspaper reporters, Supreme Court justices, and countless others don't understand is that those decisions can't be made in some esoteric environment, divorced from the real world in which consumers make choice and entrepreneurs respond to them. Just an example: I am acquainted with a small business that deals a product that can also be widely found through internet retailers. Their niche is providing in-depth knowledge of the different brands and personalized customer service, including repairs and upgrades of their products. Their competitors include so-called "drop ship" businesses. These are basically individuals, usually doing business over the internet, who take orders for a product from customers, then order the product from the company and have it shipped to the customer. In this way, they become dealers with very small overhead costs, allowing them to sell for lower prices than a brick-and-mortar business providing individualized advice and customer service both before and after the sale. If companies that make the product wish to support dealers who offer product knowledge and personalized service, one way to do that is through minimum pricing. The manufacturers are making a choice to have dealers of their products who compete on service, and entrepreneurs take advantage of that by selling both the product and the personalized service together. Other manufacturers can and do choose to let their dealers compete solely on price, doing volume sales to large retailers who can sell close to cost. These are not mutually exclusive; they can exist simultaneously in the market. It's a choice of a business model, and only the decisions that consumers make can tell us if it's the right or wrong choice. Can price floors raise the cost of goods? Perhaps. But if they do, consumers are perfectly capable of punishing the businesses that do that. If consumers don't care about customer service, the businesses that use price floors as I described will find out, without the intervention of any court, that they made the wrong choice. Whether price floors benefit consumers or not depends on the time, the place, the product, the customer, and a host of other factors that no judge or antitrust bureaucrat can know. Lawyers, judges, and "consumer advocates" are not behind the counter day after day, trying to figure out what customers want so that they can keep their business afloat. Entrepreneurs are, and they are part of an amazing system that does not need the wisdom of judges and central planners to tell them whether consumers benefit from their business models or not.

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