Cruise Ships

One of the highlights of a cruise ship trip to the Bahamas is a visit to the local market. Some bargaining will take place; you will feel good about your purchase, getting a great price, and the vendor will have sold one of his wares. This system works and has stood the test of time because there are no price floors or ceilings.

For example if I want to buy a handmade blanket for $20 in the above example with a little negotiating I can buy the blanket for $16. Still not comfortable with the price, I can walk away and the vendor will make a finally offer of $14. Because I know there are three other vendors selling similar, not necessarily the same, blankets nearby I can refuse the offer. Both of us are free to negotiate, up or down, in this scenario. I can pay $14, the vendor can lower his price to $13, or the deal can come to an end.

What would happen if the cruise ship company decided to check each vendor to ensure they were worthy, provide them perks, and guarantee a certain number of customers each day or pay him for any lost business? Furthermore, the cruise ship company agrees they will take $5 from each vendor to guarantee these benefits. In this case, the vendor will be reluctant to freely negotiate; he knows there are additional costs involved in the transaction. And, he also knows the cruise ship will pay him for any lost customers. Suddenly, his willingness to negotiate has been eroded by the establishment of a floor (guaranteed minimum) of business by the cruise ship company.

We can further complicate this scenario by supposing the cruise ship company requires the vendor to charge no more than$15 per blanket for anyone over 62 years old. Of course, people over 62 have much more free time and travel much more because they are large consumers of the cruise ship company’s services and this perk helps the company attract more clients. However, the unintended consequence of this idea is the vendor loses revenue because his costs have not changed but yet he cannot charge more than $15 per blanket to those over 62. Thus, when I approach him, at age 42, his willingness to negotiate with me has been eroded further and I am forced to pay $20 or $21 for the blanket. Throughout the bazaar this is the case because all of the vendors are forced by the cruise ship company to charge less for blankets to older people, and pay the $5 fee (tax) for benefits and perks.

Free markets will work without a problem when left alone as they have for thousands of years. Buyers will always get the lowest price and sellers will maximize profits. Unfortunately, intervention by a single entity can have huge impacts within the market. The same is true in the current health care insurance debate or any other part of our economy where the government injects monies. Anytime this happens one group of individuals will benefit while the rest of the population pays more and subsidizes false market forces. The most recent example was the catastrophic failure and unintended consequences of “cash for clunkers”. As reported, dealers did not come down on prices because the consumer was subsidized by tax payers to take home a car, not to negotiate. Ironically, the biggest beneficiary of this program was foreign labeled dealers, thus monies were artificially transferred via the program to foreign corporations that benefited from the spike in sales.

Copyright (c) 2009 John R. Nelson. All Rights Reserved.