The economics of supply cut-offs

As a number of people have pointed out, cable TV, cable internet connections, and cable streaming have been remarkably robust throughout this crisis.  Why might that be?  Let’s think through a few basic points about the economics of supply cut-offs.  This will not be a complete model, but it will focus attention on perhaps one possible factor of interest.

Imagine a seller with market power who comes close to perfect price discrimination.  That supplier will take great care to avoid supply cut-offs (imagine an electric utility investing in emergency capacity, for instance).  If a cut-off were to happen, the profits of the supplier would be much lower.  As a first-order approximation, such suppliers will invest a near-optimal amount of resources to prevent such supply interruptions.

Alternatively, imagine a nearly perfectly competitive situation where all of the surplus goes to consumers and producers earn the going rate of return.  Fixed costs are not significant.  A market collapse or supply cut-off doesn’t cut much into profits, and in essence the suppliers do not care about the losses of the inframarginal consumers, were a supply interruption to occur.

As a simple theorem, if the market is good for the producers in the first place, supply interruptions are less likely.  If the market is good for consumers in the first place, supply interruptions are more likely.

Might this also apply to health care systems?  The U.S. hospital system, in normal times, spends way too much.  Still, it has the “cultural mentality” for making capital expenditures, far more than say Britain’s NHS does.  And so the United States has far more ICU units per capita than does Britain.  Whether justly or not, the U.S. health care system might come out of this crisis looking not entirely bad.


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