High margins, high entry barriers

Microsoft reported earnings on Thursday. Its gross margin was 80.3% (i.e. the cost of goods sold was 19.7%), down from 81.9% a year earlier. (Actual revenues were down 17.3%). Revenue from desktop OS licenses were down 29%, due both to cheaper netbooks and deferral of purchases awaiting Windows 7.

On the same day, the Federal government revealed the margins of one Levy Izhak Rosenbaum as it unsealed a sweeping indictment (and conducted arrests) of more than 40 corrupt New Jersey politicians and other community members. Mr. Rosenbaum is accused of buying kidneys for $10,000 and selling them for $160,000. His cost of sales were not revealed, but that implies a gross margin of 93.7%.

High margins are usually an indication of high barriers to entry or imitation: in this case, the government forbids a market in kidneys so there is a black market with high risk and high margins. Writing in the Atlantic two weeks ago, columnist Virginia Postrel notes that — absent markets or any other incentives, there is a huge imbalance of supply and demand for kidney donations. Or, as Harvard economist Greg Makiw summarizes the article:

What market has 80,000 potential consumers each demanding one unit, 300,000,000 potential producers each capable of supplying one unit, and a shortage nonetheless?

There’s no question that stimulating and allocating a supply of kidneys could be done more effectively. Today 11 patients die every day waiting for the donor kidney that never arrives, and all of the 80,000 are undergoing some form of dialysis that many patients view as only slightly better than death.

Postrel talks about donor chains as one short-term solution within the limits of the current rules that forbid kidney sales. In the meantime, she has done her part to solve the problem by donating one of her own kidneys to someone who otherwise had little hope for a donation.