Since
there is price elasticity, and we cannot foresee a ballpark estimate of it,
Alchian and Stigler separately invented the second law of demand. They
envisioned appending a little tool in explaining behavior by better
understanding the regularity of elasticity.
This
second law says: elasticity coefficient is directly related to time. That is,
if the price of a good has changed, irrespective of up or down, then the longer
the time the price has changed, the higher the elasticity coefficient. Its
logic being: the price elasticity of a good, other than depending on the nature
of the good itself, is largely determined by the more or less of substitutes
and their prices. The more the substitutes; the more identical they are; and
the lower their prices, the higher is the price elasticity coefficient. Alchian
and Stigler considered that it took time to locate substitutes. The longer the
time, the higher is the chance of substituting, therefore the price elasticity
coefficient of a good is directly related to time.
Let’s
first consider the price of a good going up. With a higher price, quantity demanded
will decrease. And after some time, when substitutes are found, quantity
demanded will drop further. As such, the related portion of the demand curve
will shift toward the left.
How about
the price of a good going down? With a lower price, quantity demanded will
increase immediately. And after some time, consumers will reduce their demand
for substitutes, or from the viewpoint of demand of the whole market, other
consumers will gradually buy more of this discounted good, partially or wholly
substituting for what they bought before. As such, the related portion of the
demand curve will shift toward the right.
The
aforementioned logic looks fine originally. However, having been refuted by
facts in this ruthless world, this second law of demand is untenable. After
careful observation of two phenomena in Hong Kong, I cannot accept this second
law.
The first
instance relates to Hong Kong taxi fares, which have been raised a number of
times. Every time after a fare hike, patronage drops initially. Yet after
several months, patronage almost returns to the level before. The second one is
Hong Kong’s cross-harbor tunnel toll. After toll hike, the change in patronage
is similar to that of taxis – drops initially before recovering.
Following
my cue, a colleague in the Hong Kong University located the patronage figures
of Hong Kong’s tunnel for several years, clearly indicating patronage initially
dropped after toll increases before gradually recovering. Unfortunately, this
colleague caught a deer but failed to cut its antlers off, making a mess with
computer inappropriately handling too many statistical equations, resulting in
rejections by academic journals to publish his close to 60-page long essay (at
least five-fold too long).
Why was
the second law of demand refuted by facts? My explanation is, Alchian and
Stiger were half-right but forgot about the other half. The half they got right
was that finding substitutes requires time. The half they forgot was sometimes
substitutes are widely known that do not require any searching. As such, when
price goes up, consumers will immediately turn to substitutes. But after a
while, when they realize that substitutes are not so satisfactory, they revert
to the original good.
When taxi
fare goes up, who in Hong Kong would not immediately know what other substitute
transportation is available? Such substitute transportation takes no time to
find. When the toll of cross-harbor tunnel was raised, even though there was
only one tunnel in those days, who in Hong Kong did not know vehicles could
cross the harbor by ferry? After trying out ferry, unsatisfied, people would
revert to using tunnel. The second law of demand was thus refuted.
Science is
that marvelous. There is no need for additional law to restrain behavior. A
simple one could already have incessant power. The law of demand itself having
unstoppable power, there is no need for a second law.
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