I’m reading The Undercover Economist by Tim Harford, as I mentioned over at Eric’s Grumbles yesterday. The interesting thing, and Harford makes a compelling case for it, is that scarcity is the driving factor in all markets. If the cost of a product is high, yet it seems like the cost to produce it is low, look for the scarcity in the market, whether natural or artificial. The more scarcity, the higher the price that the consumer will pay, regardless of the production cost.
For example, suppose there were some sort of boundary around a city that would prevent the city from growing. As the number of people seeking to rent/own property in the city increased, the scarcity of the land would also, because the city couldn’t acquire more land. The landlord may have bought the land for $1,000 and be able to sell it for $10,000, for example, because there are more people who want the land than there are pieces of land to sell. In the real world, London has a so-called Green Belt around the entire city that acts as a boundary to the city’s growth. It also has the highest commercial and residential rents in the world, higher than Tokyo, San Francisco, Hong Kong and Manhattan, even though all four of those cities have natural barriers causing scarcity.
Scarcity of a resource, whether that resource is buyers or sellers, drives the cost. But so does the marginal value. That is, if it costs more to acquire the resource than it would cost to create it yourself, then buying the resource is not worthwhile. The example used in the book is farmland. If there is a lot of undeveloped land and only a few farmers, the rent will be low. The resource is not scarce and the marginal value is very low. If there is a lot of farmers and no undeveloped land, the rent will be high. The resource scarcity is now reversed and the marginal value is high.
Why bring all of this up? Well, in the debate over whether Microsoft is a monopoly and whether that is good or bad, I mentioned scarcity and was asked what that had to do with anything since we clearly don’t have a scarcity of operating systems. Since there are a multitude of operating systems and, comparatively, not that many buyers, the buyers should be able to drive the price down. They are scarce, not the resource. However, Microsoft and the OEM’s (Dell, Compaq, etc.) created artificial scarcity, so that there were fewer operating system choices for the same number of customers. At this point I’m not arguing whether this is good or bad. Just pointing out why the operating system market is artificial.