Tuesday, October 27, 2009

The Self Correcting Market

When college students need a mental boost to study for exams, they often turn to Adderall. These pills, which generally sell for $3 a piece, tend to increase in price to $5 around exam time.

One student reports that in his suburban Dallas hometown, drug dealers, realizing this price variation, speculated by buying up large supplies of the drug at $3 and dumping them on the market during exam time, hoping to sell at $5.

They didn’t realize that this large increase in supply would cause the price to drop below $5. Indeed, so many dealers engaged in speculation that there was a surplus at the usual equilibrium price of $3. Students were able to buy the drug for only $2 as dealers sold off their excess supply. One imagines that the dealers were less enthusiastic about speculation the next year and that the exam-week price stayed above $3.

I wonder where the bailout is for the Adderall dealers who speculated and lost. Apparently they just weren't "too big to fail."

This adds further evidence to my point, that though speculation happens, if you allow it to run its course and speculators face the consequences of their bad decision, they will not make the same mistake again.


  1. But what if the Adderall market had been cornered by one or two guys, who went bust and had to quit school? Then the kids might not have any Adderall at all the next year, or supply might be extremely limited, until the market was able to re-establish itself.

    The nice thing about colleges is that kids are always leaving school and new kids are taking there place, so the conditions artificially allow businesses to remain small. The business of catering student meals, however, is being concentrated in fewer and fewer hands. If those businesses suddenly began to serve poorer quality of food as a cost saving measure, or gradually charging more and more, or poisoning the apple sauce, there'd be almost no where to go to find a better option.

  2. "there'd be almost no where to go to find a better option."

    At first, perhaps. But this is also an opportunity for a new player to enter the market and offer better quality and/or a lower price. This is why I believe firmly that markets should remain as open and free as possible to allow competition to 1. keep the big guys working hard and 2. if the big guys fail, to allow new players to enter the market.