Kathryn Graddy: Fishing for perfect competition

Summary

In this video, economist Kathryn Graddy investigates the concept of perfect competition by studying the Fulton Fish Market. Graddy observes how fish sales, despite seeming competitive, reveal significant price discrimination based on buyer ethnicity. She finds that sellers, like Timmy, adjust prices to maximize profits, with white buyers paying more than Asian buyers. The study reveals that perfect competition is rare in real markets, where barriers to entry, like the market's tough reputation, and imperfect information distort competition. Graddy emphasizes the importance of understanding these market imperfections to improve economic theory and practice.

Takeaways

• 😀 Many sellers and buyers, homogeneous products, and near-perfect information are key characteristics of perfect competition.
• 😀 Alfred Marshall's example of a fish market highlights the conditions necessary for a competitive market.
• 😀 The Fulton Fish Market, located in lower Manhattan, was used as a real-world test of perfect competition.
• 😀 The study at Fulton Fish Market focused on the sale of fresh, homogeneous whiting fish to test competitive dynamics.
• 😀 The seller, Timmy, was observed quoting different prices to different buyers, based on ethnicity, revealing market imperfections.
• 😀 Timmy's price discrimination between white and Asian buyers indicated sellers could exploit differences in willingness to pay.
• 😀 If the market were perfectly competitive, more sellers would have entered, and buyers would have resold fish to others to profit from price differences.
• 😀 The study found that many buyers were unaware of price discrimination, as sellers knew their customers' willingness to pay.
• 😀 The Fulton Fish Market was associated with Mafia involvement, creating a reputation that discouraged entry by honest fish dealers.
• 😀 Perfect competition is rare in real-world markets, but it serves as a useful theoretical benchmark for understanding market behavior and inefficiencies.

Q & A

What does the concept of perfect competition generally involve?

Perfect competition generally involves many sellers and buyers, homogeneous products, and near-perfect information.

What real-world example did Alfred Marshall use to illustrate perfect competition?

Alfred Marshall used the example of a fish market to illustrate perfect competition, as it was a market that should satisfy the conditions of many sellers and buyers with homogeneous products.

What was Kathryn Graddy's research about, and which market did she study?

Kathryn Graddy studied the Fulton Fish Market to determine if it was truly competitive. She investigated the market as part of her research into whether perfect competition existed in real-world markets.

What did Graddy find regarding the prices quoted by fish salesman Timmy?

Graddy found that Timmy, the fish salesman, quoted different prices to different buyers, offering a higher price to white buyers and a lower price to Asian buyers for the same box of fish.

Why did Timmy charge different prices to different buyers at the Fulton Fish Market?

Timmy charged different prices based on the buyers' ethnicity because he realized that white buyers were willing to pay more for the fish, so he aimed to maximize his profits.

What does the price discrimination observed in the Fulton Fish Market suggest about market competition?

The price discrimination observed suggests that the market was not perfectly competitive, as perfect competition would typically result in uniform prices for identical products across all buyers.

Why didn't Asian buyers take advantage of the price discrepancy at the Fulton Fish Market?

Asian buyers were unaware of the price discrepancy between the two groups, which prevented them from reselling the fish to white buyers at higher prices, as perfect competition theory would predict.

How did the reputation of the Fulton Fish Market affect entry into the market?

The tough and dangerous reputation of the Fulton Fish Market, along with mafia involvement, discouraged honest fish dealers from setting up shop there, which created a barrier to entry despite the availability of empty stalls.

What is the importance of studying imperfect competition, according to Kathryn Graddy?

Studying imperfect competition is important because it helps economists understand real-world market behaviors. While perfect competition is rare, it provides a theoretical boundary that allows economists to examine why and how markets deviate from perfect competition.

What does Kathryn Graddy suggest economists should consider when analyzing market entry?

Graddy suggests that economists should carefully examine whether true free entry exists in a market and understand the barriers that prevent entry. If these barriers exist, economists should work to identify and, if possible, remove them.