By Matthew Yglesias
Slate: Sept. 17, 2012
Ever since I started moonlighting in the Breaking Bad TV Club, people have been asking me: Does it really make sense that Walter White has positioned himself as some kind of high-end meth manufacturer? Won’t desperate junkies just settle for anything? There’s no doubt showrunner Vince Gilligan has cut some logical corners to make compelling television, but Moneybox’s view is that it’s not on the economics side. If anything is shady about the idea of premium meth, it’s the chemistry.
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.
So in a basic sense there’s no reason that better meth couldn’t get you a market advantage. The problem is that it’s hard to be credible while running an ongoing criminal conspiracy. Even if meth fans prefer good meth to bad, they may not be able to find it—and when disappointed, they have little recourse. That’s a problem for addicts, but also for the rest of us. Information about quality turns out to be a serious challenge for the organization of large-scale markets. The simplest economic models deal with this by stipulating that the market under consideration features “perfect information”—both buyers and sellers know everything there is to know about product quality.
In the real world, obviously, this is rarely going to be the case. And sometimes that leads to big trouble.
In a famous 1970 paper, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Nobel Prize-winning economist George Akerlof formalized the problematic consequences of uneven existence of information. The person selling a car is intimately familiar with the product. The buyer is going on casual inspection and a test drive. Consequently, 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 problem, meth-wise, is that obviously the DEA isn’t going to certify the safety of your product. And as our Taser victim in San Francisco shows, no sensible person would believe a drug dealer is going to offer you your money back if you’re not satisfied. And this is where White’s secret comes into play. Branding. In markets where regulation isn’t present or credible, brand identity is the best assurance of quality. Overcharging you for a lousy pair of socks might be a smart one-off business strategy, but a firm with a brand label to support has an incentive to deliver on promises of quality. That’s one key reason why legal products have labels all over them and marijuana is heavily branded in places where it’s legally tolerated. In the real-world market for meth, heroin, and cocaine, by contrast, purity tends to simply decline the farther you get from the border. Smuggling is hard, so dealers sneak the purest possible product past Immigration and Customs Enforcement’s prying eyes and then dilute it as needed for distribution into the Midwest.
But what if your ultra-pure, locally sourced meth was manufactured by a special process that lends it a distinctive blue color? Well, that’s a game-changer. Instant branding. And even though the brand isn’t super-flashy, it’s got something more important than that: credibility. The hue of the product derives directly from the method of synthesizing it, so the only way to copy it completely would be to actually master the production process. What about that process makes the meth blue? Just the writers’ fiat. 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.