Subject: A little Ancillary Services Parable
From: [email-masked]
To: [email-masked]
Cc: [email-masked]
Date: Tue, 28 Aug 2001 22:57:41 -0700 (PDT)

As I had a little difficulty expressing my concerns today, I thought that I
might offer you a little parable.

One day, an enterprising young boy named Bubba decided to start a lemonade
stand in front of his house so that he could afford to buy a GI Joe with
the kung fu grip.  He set up a table, painted a sign that read "Lemonade 25
cents", and began to squeeze lemons.  Bubba discovered that he could
squeeze enough lemons for about 10 glasses of lemonade each hour.

Bubba had a bothersome little five year old brother named Scooter.
Although annoying to Bubba, Scooter loved to do whatever Bubba was doing
and decided to set up another lemonade stand right next to his brother's
stand.  Scooter was not as strong as Bubba and could only squeeze enough
lemonade for about 8 glasses each hour.  Scooter also painted a sign that
read "Lemonade 25 cents".

Initially, the two boys could sell about 8 glasses of lemonade each hour
between the two of them, but as the weather got hotter they attracted more
and more thirsty customers.  Eventually, they were selling about 15 glasses
of lemonade each hour.*  As it got hotter and baseball season began, the
boys grew less interested in their stands and the GI Joe with the kung fu
grip was not getting any closer.  Then, Bubba got an idea.  if he raised
his price to 30 cents a glass, he would make a lot more money.

The customers at first would buy their lemonade from Scooter but when he
ran out they would buy it from Bubba.  This worked great for Bubba but
Scooter did not like his brother making more money for the same lemonade.
Because he liked to do whatever his brother was doing, and because he also
had his mind set on buying a three foot plastic alligator with the remote
action chompers and realistic sounds, he too raised his price by 5 cents.
Regardless of the new higher price, the customers kept coming.  "Hey, this
is great" the two brothers thought to themselves.

But then, the good times came to a halt.  Bubba's mom discovered that he
was charging 30 cents for a glass of lemonade and she ordered him to drop
his price back to 25 cents (but not before she bored him about how lemonade
had only cost a nickel in her day)**.   Interestingly, she must have
forgotten to tell Scooter to do the same (Bubba always suspected that she
liked Scooter better anyway).

So, Bubba hatched a new plan.  If he could get Scooter to sell his lemonade
for him, he could still receive the higher price the customers were
paying***.  Thus, Bubba began making lemonade for Scooter's stand.  Bubba
kept his stand open but he never had any lemonade to sell.

Soon a long line set up in front of Bubba's stand, all eager to buy out his
cheaper lemonade.   But some of the kids became frustrated and angry when
Bubba was not selling any lemonade at his mom's ordered price.   Buzzer,
the neighborhood snitch, told Bubba's mother what he was doing and she was
not pleased.   She told Bubba "young man, I want you to go out there and
sell lemonade for 25 cents to whoever asks for it, or else"!  Fearing for
his young life, and knowing that he could not possibly squeeze enough
lemons to make all 15 glasses, Bubba made Scooter an "offer he could not
refuse".  He told Scooter that he was taking the unsold lemonade from
Scooter's stand and would pay him only 20 cents****.  Then, Bubba could
sell Scooter's lemonade to the thirsty crowd and still meet the demand
while staying out of mom's dog house.  Unfortunately, Scooter realized that
this was more hassle than he had expected and went inside to play Nintendo
leaving Bubba with the angry crowd and not enough lemonade to sell.

*  Bubba has now become a pivotal supplier of lemonade.
** Bubba's mom has just intervened in his market with a price adjustment.
*** Bubba moves his supply to the unrestrained market.
**** Scooter's lemonade has just been OOMed.

Whenever two markets are perfect substitutes for each other, market forces
will bring the prices into equilibrium through the execution of arbitrage
opportunities.  Yet, when the price in one of the two markets is
artificially managed, this equilibrium cannot exist.  It would be expected
that the market that is price managed will attract more buyers but less
suppliers.  If suppliers are not forced to participate in the price managed
market, then they will shift their supply to the market without price
controls and buyers will have to follow.  This would mark the end of the
price controlled market leaving only one market remaining.

On the other hand, if the price controlled market also can force suppliers
to deliver into its market, then the buyers would not have to follow the
supply.  In fact, in this case, more buyers would shift to the price
controlled market if it was perceived to deliver lower prices than the free
market.  In this case, demand dries up in the free market and suppliers are
forced into the price managed market.  Yet, suppliers must be paid for this
forced sale and a regulated price is developed to accomplish a fair
compensation.  Thus, relieving us all of the complexities of this thing
called competition.

Brad