Transcript Kathryn Graddy: Fishing for perfect competition

00:00 In perfect competition generally people expect many sellers and buyers. They expect homogeneous products and they expect near-perfect information. Alfred Marshall gave the example of a fish market as a market that should generally satisfy that.

00:18 My name is Kathyrn Graddy and I’m an economist at Brandeis University. I went to test to see if fish markets are truly competitive. So, when I was a graduate student I set out to study the Fulton Fish Market.

00:31 Fulton Fish Market was, at the time, located on Fulton Street in lower Manhattan near the Brooklyn Bridge. At the Fulton Market there are many buyers and sellers. One box of whiting is pretty much the same as another box. If there is differences, for example one box has stood around for a while, I would not include that box in my analysis. So I only took basically fresh homogeneous whiting of approximately the same size.

00:54 I was trying to find out whether perfect competition in the fish market actually existed. I arranged to go down there every day for a month and stood by the whiting salesman Timmy and wrote down the price of every single box of fish that he sold. I very quickly noticed he seemed to be quoting different prices. I mean some of them he’d know, some he didn’t know. But whether or not a white buyer came up or an Asian buyer came up, for the same box of fish he’d quote 80 cents, for example, to white buyers and 75 cents to Asian buyers. So I started writing down not only the prices of the box that he sold but also the ethnicity of the buyer that was buying it.

01:33 Timmy, as any good trader would - remember Fulton Street was about two blocks away from Wall Street at the time - realized that white buyers were willing to pay more for the fish than Asian buyers and he was simply trying to maximize his profits. It means that the sellers are making more money, they’re making unusual profits from these white buyers.

01:51 So, if the market were perfectly competitive a couple things would have happened. First, other sellers should enter because there would be profits to be made. Secondly, if the white buyers and Asian buyers knew about it it would seem that the Asian buyers would buy fish and resell it to the white buyers.

02:07 In fact, they had no idea that this was going on. Different buyers had different willingnesses to pay, the sellers all knew that. They didn’t have to talk to one another, they’ve been doing this for hundreds of years. Every day, every hour they set the price for fish so they were able to take advantage of this.

02:22 At the time the Fulton Fish Market was known for Mafia involvement. And it’s not that the dealers had any relationship with the Mafia, mostly people talked about it being in the parking and loading arrangements and a few unscrupulous dealers, but the point was is if you were an honest fish dealer you might not consider the Fulton Fish Market as the first place you might want to set up shop. There were open stalls, it’s not like there was a space constraint but it was known as a very tough and rather dangerous environment at the time, so that’s where the barrier to entry came in.

02:55 In fact it’s the absence of perfect competition that makes economics so interesting. So, for example, myself, I’m an industrial organization economist, and I’m looking at the way that firms price their products and the way firms compete. If every firm were to compete perfectly competitive there would be very little to study.

03:15 The key takeaway for students is there’s very rarely a market in which perfect competition actually takes place. However, perfect competition itself is an important theory or construct because it puts a boundary on the range of behaviours that we can see. And once we know that a market isn’t perfectly competitive, which very few are, one can start to study why perfect competition is failing and what in effect is wrong with that market.

03:40 One important thing to take away from the Fulton Fish Market is, while at first glance it appeared that there weren’t barriers to entry because there were empty stalls, there were barriers to entry and that honest fish dealers probably didn’t want to enter because of the terrible reputation of the market and the Mafia.

03:58 Economists should look carefully at whether or not there really is free entry and if there isn’t, understand the barriers that are there and, if possible, try to remove them.