Blog Post 2: Opportunism
I have always found opportunism an interesting moral area. Often it is portrayed as evil or comedic in movies, for example when a main character needs information and is held up for exorbitant sums of money in exchange. These hold up scenarios are complex because from an economic standpoint, there is nothing wrong with them. The main character is leaving with a small amount of surplus even after parting with so much money (or else he wouldn't have paid that much) and the supplier of the information is gaining a large surplus from the basically "free" cash. Now from an economics viewpoint, this could also be considered a monopoly or gouging depending on the situation, both of which are illegal in the United States. And this is where the morality comes in. While economics finds that both gouging and monopolies can be the optimal market outcome in some situations, morally, we know that isn't usually the case.
The same goes for these opportunistic exchanges. Like in a monopoly or gouging situation, all of the power is held by the supplier. Therefore, it is entirely up to the supplier how much surplus to leave the consumer, knowing that each bit that he gives the consumer takes from his own overall surplus. This is of course decided using morals. A good citizen would only charge what they needed to break even and leave the remaining surplus to the consumer. A bad citizen would take the entire surplus and push the consumer to the point where the deal almost wasn't worth it to them. I think that the question of this blog post is how do most people choose between these two extremes.
I would like to go through, what I think, is an interesting example. My dad is an insurance broker. The busiest time of year for him is from November to January when his clients must renew their health insurance contracts. I would often help with the paperwork back when I was in high school. Four years ago, he was dealing with one of his largest groups, who had just been sold and was under new management. Usually these renewals are a mess, with paperwork and confusion flying back and forth between my dad and the company's HR department. This group in particular was incredibly unorganized. From forgetting to send multiple employees applications, having to redo every single application, not once but twice because the employees had been given the wrong instructions and in general replying to only about 1/3 of the emails that my dad sent. By the time the renewal date was two weeks away, my Dad had had enough. He demanded that they pay him triple what they had agreed to, or he would drop them as a company and stop their renewal process. Essentially the company would be without health insurance for a full year.
A few disclaimers, my dad was already planning to drop the company after that year due to the mess, the company had moved their headquarters to England after the buyout (low chance of backlash when recruiting future clients) and he works for himself, so did not have a boss to worry about. The only downside to dropping to the clients would be a small fee they would have to split to the insurance company.
In the end, the company paid him (albeit grudgingly) and they concluded their business after that year. The question of course is whether my dad was a good citizen, a bad citizen or something in-between. If we are using the definitions that I described above, we find that my dad was actually a good citizen. While the terms that they had agreed to early on had thought to have been enough to leave my dad with a small surplus, he later found out that they had not. So, when he found himself to have run out of surplus, he made an economic decision and demanded enough money so that he could cut even. Therefore, he would be considered a good citizen, because he left the company with any surplus that remained. Although this may be a technical and logical conclusion, I am sure that many people would still argue that my dad was in the wrong and could be considered a bad citizen. My point in this example, is that while morally what my dad did could be considered wrong, when considered from an economics point of view it makes perfect sense. On the other hand, when we consider these situations from an economic standpoint, they usually don't make sense on a case to case basis.
Next, I would like to continue with a second example before going a bit farther in depth. This one actually happened to me on last Thursday night. I had yet to go grocery shopping that week, so I was ordering out from one of my favorite campus restaurants, Wingstop. Unfortunately, after an hour and a half, my food had still not arrived and I had already prepaid for it using my debit card. After a quick call, I found out that the food had been given to the third party delivery service eatstreet nearly an hour ago and that it should have been delivered by now. The workers at Wingstop immediately said that they would redo my order and send it over with one of their drivers. While I felt a bit guilty (as it wasn't their fault), I was also hungry and ended up agreeing. Within 5 minutes, I got a call from the eatstreet delivery man and rushed out to get my food. I then found myself in a hold up situation. If I didn't inform Wingstop, I would be able to get a second order of food, free of charge and they would never know.
What I ended up doing was calling Wingstop immediately and telling them that I had received my original order. While they had already prepared the wings, they hadn't added the sauce yet, so they were able to use them for another customer. In the end, I gave up my surplus and decided to break even with our original deal. Now this decision makes sense morally, but not economically. Economically, because I had the power, I should have taken the best deal possible and maximized my surplus.
I think that these small decisions that don't seem to make sense can be rationalized when looked at as a whole. As we know, one principle of microeconomics is that households try to minimalize variations in buying power (which explains savings). I think that individual's choices to deny excess surplus that they could have come from the same instinct. They picture themselves on the other end with a suddenly lower surplus than they expected and they know that in the future they may find themselves in that same situation. In the end, it makes dealings much less predictable when you are always afraid the other party will be taking your entire surplus without the slightest notice. Although the individual may win sometimes and lose others, there is not guarantee by how much and how often these winnings may occur, leaving the future very uncertain.
When looked at this way, I think we can find that the aggregate of all the situations shows a clear incentive for most people to try their best to be a good citizen.
The same goes for these opportunistic exchanges. Like in a monopoly or gouging situation, all of the power is held by the supplier. Therefore, it is entirely up to the supplier how much surplus to leave the consumer, knowing that each bit that he gives the consumer takes from his own overall surplus. This is of course decided using morals. A good citizen would only charge what they needed to break even and leave the remaining surplus to the consumer. A bad citizen would take the entire surplus and push the consumer to the point where the deal almost wasn't worth it to them. I think that the question of this blog post is how do most people choose between these two extremes.
I would like to go through, what I think, is an interesting example. My dad is an insurance broker. The busiest time of year for him is from November to January when his clients must renew their health insurance contracts. I would often help with the paperwork back when I was in high school. Four years ago, he was dealing with one of his largest groups, who had just been sold and was under new management. Usually these renewals are a mess, with paperwork and confusion flying back and forth between my dad and the company's HR department. This group in particular was incredibly unorganized. From forgetting to send multiple employees applications, having to redo every single application, not once but twice because the employees had been given the wrong instructions and in general replying to only about 1/3 of the emails that my dad sent. By the time the renewal date was two weeks away, my Dad had had enough. He demanded that they pay him triple what they had agreed to, or he would drop them as a company and stop their renewal process. Essentially the company would be without health insurance for a full year.
A few disclaimers, my dad was already planning to drop the company after that year due to the mess, the company had moved their headquarters to England after the buyout (low chance of backlash when recruiting future clients) and he works for himself, so did not have a boss to worry about. The only downside to dropping to the clients would be a small fee they would have to split to the insurance company.
In the end, the company paid him (albeit grudgingly) and they concluded their business after that year. The question of course is whether my dad was a good citizen, a bad citizen or something in-between. If we are using the definitions that I described above, we find that my dad was actually a good citizen. While the terms that they had agreed to early on had thought to have been enough to leave my dad with a small surplus, he later found out that they had not. So, when he found himself to have run out of surplus, he made an economic decision and demanded enough money so that he could cut even. Therefore, he would be considered a good citizen, because he left the company with any surplus that remained. Although this may be a technical and logical conclusion, I am sure that many people would still argue that my dad was in the wrong and could be considered a bad citizen. My point in this example, is that while morally what my dad did could be considered wrong, when considered from an economics point of view it makes perfect sense. On the other hand, when we consider these situations from an economic standpoint, they usually don't make sense on a case to case basis.
Next, I would like to continue with a second example before going a bit farther in depth. This one actually happened to me on last Thursday night. I had yet to go grocery shopping that week, so I was ordering out from one of my favorite campus restaurants, Wingstop. Unfortunately, after an hour and a half, my food had still not arrived and I had already prepaid for it using my debit card. After a quick call, I found out that the food had been given to the third party delivery service eatstreet nearly an hour ago and that it should have been delivered by now. The workers at Wingstop immediately said that they would redo my order and send it over with one of their drivers. While I felt a bit guilty (as it wasn't their fault), I was also hungry and ended up agreeing. Within 5 minutes, I got a call from the eatstreet delivery man and rushed out to get my food. I then found myself in a hold up situation. If I didn't inform Wingstop, I would be able to get a second order of food, free of charge and they would never know.
What I ended up doing was calling Wingstop immediately and telling them that I had received my original order. While they had already prepared the wings, they hadn't added the sauce yet, so they were able to use them for another customer. In the end, I gave up my surplus and decided to break even with our original deal. Now this decision makes sense morally, but not economically. Economically, because I had the power, I should have taken the best deal possible and maximized my surplus.
I think that these small decisions that don't seem to make sense can be rationalized when looked at as a whole. As we know, one principle of microeconomics is that households try to minimalize variations in buying power (which explains savings). I think that individual's choices to deny excess surplus that they could have come from the same instinct. They picture themselves on the other end with a suddenly lower surplus than they expected and they know that in the future they may find themselves in that same situation. In the end, it makes dealings much less predictable when you are always afraid the other party will be taking your entire surplus without the slightest notice. Although the individual may win sometimes and lose others, there is not guarantee by how much and how often these winnings may occur, leaving the future very uncertain.
When looked at this way, I think we can find that the aggregate of all the situations shows a clear incentive for most people to try their best to be a good citizen.
I marked this post as late. I would much rather have you get it done in a timely fashion than that you write two examples. One would suffice.
ReplyDeleteOnto your post. I found the first two paragraphs and the last two hard to penetrate or two understand what you are saying. You tried to articulate general principles that either I am not aware of, or you explained them in an awkward form that made them hard to understand. In the first case where you were talking about holdup in the movies, I really don't know what you are referring to. Just to give one example, if you look at the Joker in The Dark Knight, he definitely holds up other people, but they sure don't have any surplus after that. Indeed, they've been murdered.
The situation you describe with your dad and a problem client made the most sense to me. He is, after all, a business person and he has costs for providing services. Those need to be covered. But, at least the way you told the story, he might have feared the clients would never pay him and as I gather he had already incurred costs in servicing them. So he may have made a judgment that this was the best way to balance covering his costs and getting paid. I would term that as a sensible business decision, but I would not call it being a good citizen. It was all reactive. Being a good citizen I think of as being proactive.
For your other story, did you prepay for the food with a credit card? If so, that detail was important for your story, but i didn't see it there.
Understood. I'm sorry for the inconvenience
ReplyDeleteThe example that I am trying to get at with the first paragraph is a common archetype. I can't think of any specific examples at the moment. The general idea is that one person has information another wants. The individual with the knowledge reveals what they know piece by piece for more and more money. A "$20 might refresh my memory" sort of scenario. In the last paragraph I am talking about the microeconomic theory where we consider household budgets in with incomes in two time periods. We see then that households try to limit deficit spending and budget surplus so that their income is as close to stable as possible. This is shown as savings or taking loans depending on whether the first period income is higher or lower.
I'm not sure how you came to the conclusion that my dad may not have been paid at all. That was never discussed or threatened. You are correct in your analysis of why he made the decision though.
I did prepay for the food, that is the only way to do it through a third party delivery service. I will edit that into the original post.
I focused on your example with your father. It seems from the situation, that he was under a lot of stress and doing unnecessary work to renew the groups insurance. From your fathers point of view it makes complete sense to demand for more money since he probably had to do more work than what was agreed upon in the first place and needed to be compensated. This example of hold up is an interesting one since he waited till there were only two weeks left before the deadline to make his demands. This probably gave him a lot of bargaining power since it was too late for the company to find another business person to handle it. And since your father was planning on dropping them as a client anyway I would say he made a smart choice to earn more money. Whether or not he was justified in demanding more money or holding up the company could be seen as morally wrong or not. However, I think he was justified since they were causing him unnecessary work and trouble.
ReplyDelete