Market Structure

          

Yay "Free" Market!

              A market is a description of the where buyers and sellers of goods and services meet to exchange goods and services. In the olden days, it was a physical place and often set times. The Greeks called their market the agora. It is where the term agoraphobia is derived from. People who do not like being around people were afraid of, at the root, being around people where they congregated the most.

            Thankfully, for the agoraphobic and the buyers and sellers of goods, when the term market structure is brought up, it is not talking about which vendor gets the choice stalls by the entrance. The market is all around us, and it is not just one market. There is an individual market in each good and service that equals the entire market when summed. Instead, when economist talk about market structure, what they are really talking about is the individual power the market sellers have to set their prices and the profits available at in those markets. The market power is a direct relationship with how many sellers of a good there are, and how hard it is for a new seller of the good or service to start selling.

            The best way to think of all the possible market structures is to think of a spectrum. On one end, there is a market with only one seller. This is what is termed a monopoly. On the other end there is a market with an infinite number of sellers, or at least so many that one firm entering or leaving the market makes no effect on the market, because the idea infinite sellers is just a simplification. Two other market structures rest in the middle: Oligopoly and Monopolistic Competition. Monopolistic competition has fewer suppliers than perfect competition, and an oligopoly has fewer still. Each of the four market structures will be dealt with in turn.

            The first kind of market is a market in perfect competition. This is the market that is unaffected by a firm or other seller deciding to sell or stop selling. A firm in a market with perfect competition is one that is a price taker. The market price is the only price they can receive for what they are selling because if they price their goods higher than the market price, then no one will buy what they are selling. No one will buy what they are selling is because a potential consumer can just walk on over to the next person selling what they are selling and buy it at the market price. There is no differentiation this scenario because by definition what firms are selling are all the same. The simplest example of this is agricultural products. If Alpha Corp is selling apples at four bucks and Beta Corp is selling apples at four bucks, then Gamma Corp has to be able to sell at four bucks or else it should not enter the market for apples.

How is this four bucks determined? It does not come from the sky. The crucial part of perfect competition is that there is no economic profit to be made.  Economic profit is often called “rent” the price over and above costs that a firm should make. That is not to say that there is no accounting profit to be made, or else no firms would enter the market. Instead, the price in a perfectly competitive market is one where the price is equal to the marginal cost where it intersects with the average total cost curve. A firm in a competitive market would maximize profit by selling as many apples as it takes until the marginal cost of the last apple sold equals the market price (Besanko et al. p. 173).

Moving down the spectrum is a market structure where there are fewer firms and the products have some sort of differentiation. Instead of looking at apples or oranges, the market could be juice and firms could be selling apple juice or orange juice. In a monopolistic competitive market, there are many sellers. A difference between monopolistic competition and perfect competition is that in a monopolistically competitive market there is a slope to the demand curve. In perfect competition, the slope of the demand curve is zero, meaning it is a flat line at the market price, or perfectly elastic. Any price that is not on the demand curve results in a quantity sold of zero. This is not true in monopolistic competition. The sloping demand curve means that there is some flexibility for a firm to sell on price. They can climb to the top of the tallest tower and scream that their juice is better (vertical differentiation) or they can shout that their juice is closer (horizontal differentiation). The firm can even tout that it has a qualitatively inferior product, but at a lower price. As long as those prices are at or above that magical sport where the marginal cost curve intersects with the average total cost curve, the firm should be in business. That is the quantity they want to make to stay in business. If above, that means it is making an economic profit. That profit means that the market will attract entrants who want a piece of that pie, and it will continue to do so until total economic profit for the market goes to zero (Besanko et al. p. 180). Such is the nature of monopolistic competition. The flip side is also true, though. If there is negative economic profit to be made, the firms with the highest costs will leave the market and equilibrium profit will go back to zero.

A market with even fewer firms is an oligopoly. A defining characteristic of a market that can be called an oligopoly is that the firms within the market are very aware of the actions of the other firms in the market, whereas in the previous markets studied the firms all acted rather independently of each other (Besanko et al. p. 180). One example of a contemporary oligopoly is the large farm equipment market, where two firms, Deere and Caterpillar dominate. In high concentrated markets like the one for large farm equipment, the potential for informal coordination exists so that the participating firms can split the market and reap the rewards of their power. This means that the firms have power to set prices. The firms are no longer price takers, but are price makers up to a point.  Many models exist to describe both a static and a dynamic market that is split between large players. The key takeaway is that the firms will realize the most profit in the sort if they act as if they were a single monopolistic firm, through tit for tat pricing and other ways to coordinate pricing without deliberately forming an illegal cartel. The problem is that as long as there are not significant barriers to entry, other firms will see the profit potential and try to enter that market so that economic profit drops. This is why oligopolistic competition is often seen in industries where there are large capital and regulatory barriers to entry, such as large farm equipment manufacturing or mobile telephony. Other firms maintain their oligopoly through network effects and high switching costs, such as social media and banking.

The final form a market can take is when the bulk of the supplying is done by one firm. This does not mean that other firms cannot exist in a monopolistic market, but that for overall price and quantity produced they more or less do not matter (Besanko et al. p. 176). This is not to say that a monopolist can charge any price for the goods and services it sells. The demand curve is not perfectly inelastic; it is also downward sloping. This means that if a monopoly raises its prices, then it will lose customers. The profit maximizing quantity produced of a monopolist is where the marginal revenue of the last item sold equals the marginal cost of making it. This means there is a limit to how much a monopolist can produce until its profits start decreasing. In this way, the monopolist is the market. It can structure prices in ways to limit entry, but in practice, you see very few monopolies in the real world. Federal regulators for the last 140 years in the United States have been wary about the potential of monopolistic markets driving up the cost of goods and the quality of the goods sold. Market concentration does drive up price, as noted by economist Leonard Weiss (Besanko et al. p. 191), but that does not mean all monopolies are bad. Microsoft was able continue with its dominance over the personal computer operating system market because even though it reaped high profits, the consumers ultimately benefited from the network effects of having industry standard software. Note though that even this monopoly was transient. As the use of computers changed, the stranglehold of Windows and the Office products waned. The lasting monopolies are instead those that are considered natural monopolies, where duplication of services is inefficient. The best example of this is in the distribution of utilities. Laying pipe over the right of ways is most efficient when there is only one entity doing it. It is also easiest when there is state coordination to grant those right of ways or to appropriate them through eminent domain – something that is not within the rights of a private corporation (Kelo v. City of New London excluded). This is why the monopolies that do persist are either highly regulated or have been subsumed into the state apparatus.

In the end, there is no one best market structure. Each market is different based on the goods and the services sold, and the various barriers to entry and exit. The important thing is that for each market and each firm within a market, there is an optimal amount of goods and services that can be provide to maximize. The challenge for each firm is hitting that sweet spot.

References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2013). Economics of Strategy (6th ed.). New York: Wiley.

An In-Depth Look at the American Chocolate Industry

Chocolates off the line

Chocolate as we know it is a relatively new invention. In 1828, a Dutch chemist invented the cocoa press, which allowed separating cocoa butter from the cocoa beans. It was not until 1847 that J. S. Fry & Sons, a British company made a chocolate bar combining cocoa powder, cocoa powder, and sugar. It was even later when mass production became possible with Lindt’s invention of the conching machine in 1879 (“Sweet History”). Processed chocolate caught on quickly. By a hundred years ago, it was one of the most popular confectionary items, in spite of a high price (“Chocolate”).

Chocolate has a much longer history. For the first three and a half millennia it was consumed as a food item, it was part of a drink mixed with water, vanilla, honey, and chili peppers. It was a rare treat for the upper classes of various southern American indigenous tribes such as the Olmec, Mayan, and Aztec tribes. This concoction was imported to Europe with colonization. Along with gold, the Spanish brought back chocolate, which remained an aristocratic treat (“Sweet History”).

Today, we can enjoy Chocolate in many forms, and throughout the year. In the United States, chocolate is an integral part of many holidays from Valentine’s Day to Easter to Halloween. It is also a year round treat that can be picked up almost anywhere in familiar forms for a low price. It is no longer just for the rich of pre-Columbian South America or the royals of colonial Spain. Chocolate is America’s treat. This paper will look at the current market for chocolate in the United States using the five forces analysis as described by Michael Porter and summarized in Besanko et al. in their 213 edition of “Economics of Strategy” p. 258-256.

The current market for chocolate is large. The average American is measured to consume twelve pounds of chocolate annually (“Sweet History”). Globally, the chocolate industry is expected to amount to $98.3 billion dollars in sales by 2016 (“How Large”. The United States is the number one consumer of chocolate, consuming 764 tons of chocolate (“Cocanomics”). This consumption translates to over 18 billion dollars in sales in 2010 (“Sweet History”). A quick look at the math shows that the American sweet tooth takes a large bite out of the global chocolate consumption.

The market for chocolate is divided by different segments. The divisions are by product, sales category, and geography. The product segment looks at the type of chocolate. There are different breakdowns for dark chocolate, milk chocolate, and white chocolate. The sales division looks at how the chocolate is sold and breaks down into category by premium chocolate, every day chocolate, and seasonal varieties (“Global Chocolate Market”). For many of the segments, different brands dominate. Whitman’s would be picked up more at Valentine’s Day while a Snickers is something that is directed towards a more every day chocolate.

The supply chain is long. The basis of chocolate is the cocoa bean. It is grown in equatorial regions across the world. The means most of the chocolate is grown in Southeast Asia or south America or Western Africa. The beans grow straight from the tree. A single tree can only yield enough beans for half a kilogram of finished chocolate per year. From growth, the bean is harvested, dried, taken to market, packed, roasted, ground, and processed. It is then made into chocolate and shaped into the form it will take for the consumer (“Cocanomics”). Other key inputs include sugar and dairy, which can be obtained from domestic markets for the American consumer.

The trade group representing the chocolate manufactures is the National Confectioners Association. They are bullish on the continued growth of the chocolate market at a rate above the expansion of the national economy. They forecast growth prospects at between three and four percent per annum for the next several years. Categories seen leading this growth include both dark chocolate and premium products (“Profile”). The growth prospects reflect the continued growth of the national economy, but the specific segments of growth show that as a nation we are tired of tightening our belts and are looking for specific ways to treat ourselves. Finer chocolate is an affordable luxury for most people.

Approximately 400 companies make up the chocolate industry in the United States. These companies manufacture ninety percent of the chocolate. These 400 companies support almost 70,000 jobs in the direct manufacture of the chocolate, and it is estimated twice as many more when the distribution and selling of the chocolate is taken into consideration (“Economic Profile”). The majority of these companies are rather small. Instead, the chocolate market is largely split between global giants. The biggest share of the chocolate market in the U. S. is enjoyed by Hershey, with 44.2% of sales. Mars is next with 29.5% of the market. Nestle, Lindt, and Russell Stover each have about five percent each. That leaves all other companies with just 11.6% of the market by sales (“Market Share”). Assuming the smaller three hundred and ninety five companies split the final 11.6% of the market equally, that gives the chocolate market a Herfindahl index of .29. An index of .29 shows that the market for chocolate in the United States is rather concentrated, to the point where it can be considered an oligopoly

            As the leading firms in an oligopoly, the Hershey and Mars have considerable power over the pricing and quantity of the chocolate they produce. There is some overlap in the types of chocolates produced, but a key aspect of the chocolate market is that there is strong brand loyalty. This brand loyalty has been built up through years of advertising and concentration amongst the industry. This differentiation means that the products of Hershey and Mars are not complete substitutes, and that they have certain aspects of monopoly power within their brands. There are plenty of substitute goods, so brand loyalty just means that the demand curve for specific brands is more inelastic than the market as a whole, giving the larger firms some pricing power. Even with this power, it is seldom used. The price of all chocolates has risen inexorably over time with inflation and it is often a spontaneous purchase, so it is in the best interest of all companies to sacrifice unit profit over volume profit and to keep the familiar brands an affordable commodity.

            In theory, entry into the chocolate market should be easy. All a potential entrant needs is the know-how to put the constituent parts together and then a place to sell the final products. This is true for very small producers. They can fill a specific niche as a specialty maker, but their own market will be geographically limited as well as limited by the expectations of the potential consumers in the geographic area served. How many consumers will pay more for a chocolate product when there is a much lower price substitute available almost anywhere? To go with the supposed ease, few high governmental hurdles exist to hinder entry.

            In fact, the barriers to entry are fairly high, since the market is dominated by so few firms. These larger firms have the knowledge and the scale to operate at lower costs than most new potential market entrants do. The price the consumers pay has not been artificially inflated, so if a new firm wants to enter the market, they have to achieve similar cost structures as the incumbent firms or forego the profits the larger companies make. Further, as spoken earlier, many consumers are brand loyal. Favorite chocolate brands are developed as a preference at a young age and that is hard to shake. The big companies foster this brand allegiance. Hershey, for one, tries to keep itself in consumer minds as an honest and trustworthy brand (“Brand Equity”). They have even gone so far to try to associate their brand with fun by building a theme park in its hometown of Hershey, Pennsylvania. The strong brand awareness creating high barriers to entry is seen even with the bigger companies. Often if they want to introduce a new product, it does not hang by itself but is tied to an existing brand. A new candy-coated malt ball product is does not have its own name, but instead it is reintroduction of Crispy M&Ms.       

            Further barriers to entry are the scale at which the big companies operate. To have almost half of the chocolate industry entails a lot of knowledge in the manufacture and marketing of chocolates. It also means a lot of experience with the supply chain, which as we have seen goes all the way back to the growth of the original tree in Africa, South America, or Southeast Asia and into the tummies of satisfied Americans from Bangor to San Diego.  

When Americans want to treat themselves, they have other options than chocolate. There are various substitutes, from crunchy chips, to salty peanuts, to savory beef jerky. The availability of these substitutes is what keeps the lid on some of the pricing power. The chocolate industry is considered a subset of the confectionary industry, which includes many of the possible substitutes for chocolate. In spite of the many available substitutes, for the confectionary industry as a whole, chocolate accounted for over sixty percent of the entire industry. The industry itself has grown at a rate comparable to the growth rate of chocolate sales, meaning that the overall share of chocolate as a percentage of the industry has remained stable (“Confectionary Industry”). The continuing growth of the industry as a whole and for the chocolate segment in isolation bode well for industry, as being an affordable treat; it is also shown to be rather recession proof. People will continue to buy chocolate because chocolate is pleasing to the American palate in a way that those other substitutes are lacking.

Sugar and dairy are huge inputs into the chocolate industry as raw materials, but the one thing that makes chocolate chocolate is the cocoa bean. Once that is harvested, refined, and pressed, then the end user can enjoy a chocolate bar or a bonbon. That cocoa bean is also the source of much worry. Though the bean originated in South America, as of 2014 47% of U. S. cocoa imports came from the Cote d’Ivoire (“Economic Profile”). This is narrow neck for the supply chain. If any geopolitical issues arose in that country, there would be a price pressure on the raw materials that are needed to make chocolate. Ultimately, even if the prices doubled from that one supplier, there are other countries that fill the gap. There is also the fact that the raw materials cost for the cocoa is only a small fraction of the ultimate price the end consumer pays. It is estimated that only eight cents of every dollar stay with the immediate producers of the cocoa bean (“Cocanomics”).

            A larger worry would be if something happened on a global level that harmed the supplies from all cocoa growing nations. That would mean there would be fewer beans to meet the supply and no substitutes for them. Unfortunately, that has happened. Weather issues from drought and a fungal disease known as frosty pod have put significant price pressure on the chocolate industry globally. This supply shock has seen the larger companies approach different changes. Some companies have raised prices at the retail level, while others are reformulating their products in the hope that the public will accept less chocolate and more nuts and nougat in the mix (“Cocoa Crunch”)

            A final consideration for supply issues is in the use of sugar. The American government has long protected domestic sugar growers, limiting import of sugar from abroad where foreign growers can refine sugar at lower cost. This means that any chocolate made in America will have a higher cost because of higher cost American sugar (“Confectionary Industry”). This increased cost of sugar is an issue that is faced by many of the substitutes for chocolate, so it is not a pressing concern for the chocolate industry as they try to maintain their advantage over the other segments. The pressure on the cocoa bean is real and is a potential game changer. If the supply of cocoa beans dries up, the cost of chocolate will take it from an affordable luxury to a product to be enjoyed in limited amounts at special occasions or just a thing rich people consume.

            Buyers have a lot of power in the chocolate market. The end consumer is the one that will eventually take all of the output from the firms, but there is a key mediator between the consumer and the companies manufacturing the chocolate. That mediator is the retail stores that the majority of the chocolate sold has at appear. Mass-market stores such as Target and Walmart are the largest sellers of chocolate, followed by drug stores and supermarkets, with convenience stores in fourth place (“Sales by Distribution Channel”). This means that there is a finite amount of space that all chocolate or confectionaries can take up on the shelves. Given a finite space, the power of the branding is crucial. Stores want to stock the familiar brand that will move product, not to try out something new that may or may not sell. It also gives the firms selling the goods power. If they want to pay a particular price for the wholesale box of cholates, they can ask it. If they are a large enough customer of the chocolate companies, they will get that price and thus be able to sell their good for less or capture more of the profit. An example is Walmart. If your product is not on the shelf at Walmart, then in many areas it is just not for sale at all. Walmart prices many of their candy bars at just a dollar. Who is taking the haircut there, Walmart or Hershey?

            Further pressure from buyers might be seen in two different areas. First of all, even though it might be easy to be flippant about the prospects of industry growth, saying, “As long as people are gaining money, they will continue to buy chocolate. You can’t cure a sweet tooth,” there are some potential pressures that the end consumer might take. The first potential pressure on the makers of chocolate by the buyers of chocolate is that there is question over how their chocolate is grown. The West African nations that grow the cocoa are poor and poorly governed, so it should be no surprise that there have been allegations of human rights abuses including reports of child trafficking and slavery on the cocoa plantations (“Chocolate”). Fair Trade chocolates have filled a niche at a higher price point than the large companies trying to alleviate the fact that the grower of the cocoa received a small amount of the ultimate dollar spent – and even that amount is shrinking (“Cocanomics”). Ultimately, for the good of the industry, the players will want to ensure that the raw materials are sourced from reliable vendors, but in the short term, it has proven that few of the ultimate customers are looking too hard at where their chocolate comes from.

            The second demand pressure from the end users may come from a growing health consciousness about the food consumed. Most chocolate is high in diary, fat, and carbohydrates from the added sugar. Of the twenty-four pounds of confectionaries Americans eat, a lot of that weight sticks to the bones. Accepting the fact that some Americans are becoming more health conscious, chocolate companies are filling the gap to create a healthier chocolate. Varieties of chocolate have been released with less gluten or less sugar or less fat (“Healthier Chocolates”). Ultimately, chocolate is not a staple of the diet, instead it is a limited treat portion. Americans as a whole seem to not want much of the healthier chocolate offerings for now, relegating the healthier choices to a small niche of the chocolate industry as a whole.

            The economy as a whole looks to be in full recovery mode. Jobs have been added at a fairly brisk pace, the unemployment rate is going down, and the stock markets have been reaching new highs lately. The recovery has also trickled down to the consumer level. The chart in figure one shows the real percent change in consumer expenditures. The drawback during the crisis is evident, but looking at the last few years, not only has spending by consumers been growing, the general trend for growth is positive, meaning consumers are finally starting to feel comfortable spending money again, almost a decade after the peak of the housing bubble. This bodes well for industries that are highly reliant on consumer spending such as the chocolate industry. Barring any unforeseen shocks, the industry anticipated rate of growth of between three to four percent seems within reach as long as no consumer preferences change.

Figure 1

               

The main firms within the industry are in a good position for further success. They have the use of the learning curve and have long ago achieved economies of scale so that they have lower costs than potential rivals have and have built strong brands that will be hard to compete with. These large firms should maintain a steady-as-she-goes outlook, not diluting their brands but also on the lookout for new opportunities. The lesser firms should continue finding the places where the larger firms are not, filling in the spaces for specialty chocolatiers and fair trade and health conscious fare. They may not be able to challenge the giants, but they could find a profitable living in these areas.

Overall, the prospects for the continued success and growth of the chocolate look good. The consumer base is built in and enjoys the products. There are few negative externalities built into the consumption of chocolate, in that it may be unhealthy for the consumer and unhealthy in a different way for the producers of the raw material. The supply of cocoa is the only real unknown in the health of the industry. Chocolate is competitively priced with regards to its potential substitutes, but a supply shock to the cocoa plant may see some switching. The demand for chocolate is inelastic, but only to a point. It is now widely enjoyed and pricing pressure might limit it to a special occasion consumer item. The market continues to grow as a whole even though there are barriers to new entrants.

            Doing the research for this paper has been instructive on the varieties of chocolate and the various substitutes that exist. A surprise was how much of the general snack and treat market was occupied by chocolate. A further learning experience was in finding out about the concentration of the chocolate market between just two big players, while the rest of the firms struggled for the crumbs and other market niches abandoned by the big players.

References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2013). Economics of Strategy (6th ed.). New York: Wiley.

Bradford, C. (2015). How Large Is the Chocolate Industry? The Houston Chronicle. Retrieved from http://smallbusiness.chron.com/large-chocolate-industry-55639.html

Klein, K. (2014, Feb 14). The Sweet History of Chocolate. The History Chanel. Retrieved from http://www.history.com/news/hungry-history/the-sweet-history-of-chocolate

National Confectioners Association (2011, Aug 9). Profile of the U.S. Chocolate Industry. The Story of Chocolate. Retrieved from http://www.thestoryofchocolate.com/About/content.cfm?ItemNumber=3623

Nicholson, M. (2013, June 4). Demand for 'healthier' chocolates on the rise in US. FOX News. Retrieved from http://www.foxnews.com/health/2013/06/04/demand-for-healthier-chocolates-on-rise-in-us/

Maduri, F. (2014, Nov. 21). Cocoa crunch: The worldwide chocolate shortage. United Press International. Retrieved from http://www.usnews.com/opinion/blogs/economic-intelligence/2013/11/19/priceline-hershey-sbarro-and-the-importance-of-brand-marketing

PR Newswire. (2013, May 3). Markets and Markets: Global Chocolate Market Worth $ 98.3 Billion by 2016. PR Newswire. Retrieved from http://www.prnewswire.com/news-releases/marketsandmarkets-global-chocolate-market-worth--983-billion-by-2016-121143359.html

Raines, C. (2015). Analysis of the Confectionery Industry. The Houston Chronicle. Retrieved from http://smallbusiness.chron.com/analysis-confectionery-industry-70206.html

Statista. (2014) Chocolate dollar sales during Christmas season in the United States in 2012, by distribution channel (in million U.S. dollars)*. Statista.  Retrieved from http://www.statista.com/statistics/304175/us-chocolate-sales-during-christmas-by-channel/

Statista. (2014). Market share of the leading chocolate companies in the United States in 2014. Statista. Retrieved from http://www.statista.com/statistics/238794/market-share-of-the-leading-chocolate-companies-in-the-us/

The Federal Reserve Bank of Saint Louis. (2015, March 2). Real Personal Consumption Expenditures. The Federal Reserve Bank of Saint Louis. Retrieved from https://research.stlouisfed.org/fred2/series/PCEC96/

Torre, I. and Jones, B. (2014, Feb 7). Cocoa-nomics explained: Unwrapping the chocolate industry. CNN.com. Retrieved from http://www.cnn.com/2014/02/13/world/africa/cocoa-nomics-explained-infographic/

World Cocoa Foundation (2014). Economic Profile of the U. S. Chocolate Industry. The World Cocoa Foundation. Retrieved from http://worldcocoafoundation.org/wp-content/uploads/Economic_Profile_of_the_US_Chocolate_Industry_2011.pdf

Irving Fisher's Debt Deflation Theory of Great Depressions

The version I have is a version put out by "ThaiSunset Publications".

It includes the paper, which is a very important paper in terms of the history of economic thought, and it includes some poorly reproduced graphs that Fisher talks about in the paper. It is also fleshed out with a biographical note that might have come from anywhere - pedia. I didn't catch out any glaring inconsistencies in the history.

My guess is that you can get this somewhere else for less. Even with all the padding, my copy is just over a hundred pages.

One more thing. Yes, Fischer might be most famous in our time for being the prominent economist who claimed before the 1929 crash that stock prices had reached a permanently high plateau. He was wrong on that call. But prior to that and after that he did a lot of important theoretical work that should be his legacy. At they very least he invented some data storage techniques that made him a rich man.

So, the paper shows the mechanism how debt leads to great depressions. Prefigures Keynes "General Theory," and should be in your bag of tricks. Maybe just not the edition I have.

No Real Heroes: Reading "Barbarians at the Gate"

Reading this, my wife asked if I liked the book, and what it was about.

My quick answer was that it was the real life version of American Psycho.

Maybe that is too harsh a criticism. I know Ellis was mocking this milieu when he was writing his books in the late 80s and early 90s. He has a lot of crossover between characters in different situations, and shows how small the Wall Street world of the time was, but also how faceless. The only difference is that in this book there is not a lot of murders, real or imagined.

It actually took me a while to finish this book. I’m just young enough I don’t remember the RJR Nabisco buyout, and I had never heard of Ross Johnson before reading this book. My memory of Barbarians at the Gate was an advertisement for the movie on TV.  Basically it took me a whole to read because there was no good guy to root for. Everyone had some weakness, and the narration didn’t construct the story of the buyout in such a way that it was the vindication of Kravis or the downfall of Johnson. It felt indifferent and impersonal – here’s a thing that happened. I don’t know if that was intentional by the authors or not. The one thing that really comes out from the book is that the whole LBO or private equity industry looks bad.

I think the authors wanted to show how bad the LBO industry was. If that was the goal, they succeeded. It did die down for a while. But the real funny thing is that the amounts that are supposed to seem obscene now seem tiny after the financial crisis. I’m not going to a 1989 inflation calculator to get the real terms of the buyout, but 25 Billion in nominal terms just seems small. The authors touch on this in the afterward.  

The short termism and the greed that are illustrated here are still in play on Wall Street. Kravis is still doing buyouts. The names of some of the firms have changes. The suits look a bit different. The securities laws have been amended.

The barbarians still wait.