Breaking Bad and the Problems of Premium Pricing


The ever-clever Matthew Yglesias was thinking about Breaking Bad as we all do from time to time, and probably will incessantly until it returns next summer. The narrative of Breaking Bad boils down to one ex-chemistry teacher cooking crystal meth so good that he conquers his competition. But does this plot make sense economically?

The basic shape of the problem is illustrated by a late-August story out of San Francisco. A man in his early 50s bought some meth on Sixth St., sampled the product, and decided the quality didn’t pass muster. He chose to confront his supplier about it, much as one might complain about the purchase of any kind of good or service that didn’t meet reasonable quality standards. The problem, as it turns out, is that meth is a bit of an unusual product in that it’s typically sold by violent criminals. Complaining to the dealer didn’t reap a refund; it got the complainer tased, stabbed, and—adding insult to injury—mocked in local blogs for his misfortunes.

Part of what we learn here is that meth addicts are people just like you and me. They want a quality product, and they’re disappointed if they don’t get it.

Despite being addicted, it seems that meth addicts still appreciate a premium product. The problem remains, though, that they have no way of actually finding this product. There’s no Yelp reviews on meth dealers, and one product would look almost identical to any other. Yglesias analogizes it to the lemon dilemma. Specifically, the issue any car dealer faces when trying to sell a used car:

The seller has incentive to mislead the buyer about product quality. The crucial fact, however, is that the customer knows this and is bound to discount the used-car salesman’s claims. The problem here turns out to be not just that customers might get ripped off, but that customers’ fear of being ripped off means that nobody will be willing to pay a premium price for a premium product. If you want to make money selling quality, it’s not good enough to have a good product. You also need to credibly signal to your customers that you’ve got the good product.

Businesses cope with these problems all the time. You might offer discounts or money-back guarantees to get customers in the door. Once they’ve come, you can build credibility and favorable word of mouth. You can also rely on regulation. Companies don’t love it when the government butts into their business, but the existence of the FDA gives customers confidence that they can buy those canned goods on the shelf in the supermarket without fear of disease from deadly microbes lurking within.

The key, in terms of the illicit meth trade, is branding. Without FDA (or DEA) certification, there is virtually no way for a reasonable consumer to identify what is worth paying a premium price for. Except, that is, for branding. Safety and purity is an issue among the less tolerated drugs, e.g. heroin, cocaine, and meth. But if one of these illicit products could be reliably branded, it would lead to an enormous demand, especially if it were of high quality. In Breaking Bad, exactly that happens when Walt begins experimenting with the blue-colored crystal.

There’s no real scientific explanation; it’s just a plot device from the show to make Walt’s product more recognizable. But that little tweak of the chemistry makes all the difference economically. Rivals can—and in the show do—try to dye their inferior goods, but adding food coloring to white meth doesn’t reproduce the distinctive color of Blue Sky. And by the same token, any dilution of the product would dilute the color. Suddenly you have the most persuasively branded product in the whole world. As such, charging a premium price for a premium product should be no problem. Alternatively, if the product can be produced at large scale (the central drama of the show), it will undercut all rivals and gain massive market share. This doesn’t work in the real world, but that’s just because the chemistry of meth manufacture doesn’t support the scenario. The economics are just fine.

If you search the internet long enough, though, you’ll find that reviews of quality meth can be found.


Attribution

Matthew Ygelsias, “The Best Meth Anywhere,” Slate


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