For the Next Time You Teach Monopolies

Here’s a very good article from The Economist on substitutes and why monopolies don’t have absolute power in the marketplace. (Thanks to Carpe Diem for the pointer.)

I know I’m constantly dealing with the perception that monopolies have ultimate pricing power. I face it with my high school students, my undergraduate students, and occasionally even with graduate students. 

They seem to forget a factor in demand is the availability of substitutes.  And as prices rise, the search for substitutes often gets more intense. Once those substitutes are found and economies of scale can kick in, (this can be a significant period of time) the monopoly may suddenly find itself the victim of creative destruction.

There are other factors to pursue, of course. But this has the potential be a great discussion starter or an anecdote to toss into discussion.

The Value of Cutting Costs

Recently, I took an online course that focused on economic development and poverty. One of the discussions we had questioned whether technological innovation benefited the rich, the poor or both.  One of the conclusions was that, because of the cost of innovation, initial benefits tended to gravitate to the rich because they could pay a price that would compensate the producer.  But over time, as the cost structure changed, the benefits were realized by those at lower income levels, as well. One of our classmates even noted that, because of the passage of time, the technology was actually better quality as well as cheaper by the time it became available at lower prices.

Yesterday, there was an opinion piece in The Wall Street Journal that dealt with that topic. It reinforces the point that the real value in innovation may not come in the initial stages - many innovations don't last very long.  But for new products and technology that does last, the real benefit comes as producers find ways to reduce the cost. And I will add, improve the quality and reliability in the process.

This relates to my post from one week ago which linked to a discussion of poverty and choice.  It also reminds me of a quote from Joseph Schumpeter who once said "The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls."

I welcome your thoughts.

March Madness Econ Style

For those of you who are looking for a different take on March Madness to share with your classes, Greg Mankiw gets a HT for pointing us to this blog. I'll let you read what the author used to determine each outcome. Suffice it to say “Princeton to win it all.” (I wonder what would constitute a "bracket buster"?)

Rent-Seeking, Public Choice and Margarine

Mark Perry offers this post on Carpe Diem about butter, margarine and opposing interest groups.

I actually believe I had heard this before, but I must have forgotten it.  It does sound familiar. It's an excellent example of rent-seeking by interest groups; and Mark brings it around to discussion about trade issues and why special interests can do a better job seeking protection and a beneficial position in the marketplace at the expense of consumers.

I recommend you give it a quick look and see if might serve you as an example for your classes.

Information, Prices and Competition: A Bigger Threat to Mom & Pop?

There was a fascinating article in today's edition of The Wall Street Journal. The article (free content at this writing) was about how new apps on smartphones make it easier for people to comparison shop and the pressure that is putting on certain retailers. One anecdote had a shopper seeing a gift for his girlfriend at a big box electronic store. He whipped out his smart phone and found it at an online store for considerably less. He purchased from the online store while standing in the big box.

This article has a lot of potential for use in microeconomics. You can discuss the role of "perfect" or at least improved information in setting prices and making competition. You can discuss consumer and producer surplus, and willingness to buy and sell. You can even go into the idea of value and utility, and make a case that the higher price in the big box was because they offered better time and place utility for the item - delivery and "satisfaction" would have been immediate because of no waiting for delivery.

But I will suggest one more angle. What do these new apps bode for the “mom & pop” stores on Main street? If many of us are upset because various big box stores threaten to put small retailers out of business because of better pricing; how can those same small retailers compete with the lower prices that come with better information? Granted, not everyone has smartphones. But the history of technology suggests that as time goes by, the price of those devices will fall and competitive pricing information will be available to more and more people.

I look forward to your thoughts.

Competition, Rent-Seeking and the Role of Government

This has to be a quick post.  In today's edition of The Wall Street Journal (free content at this writing), there is a great story on food trucks in Chicago. The owners are trying to compete in slow economy. Existing restaurant owners are bringing pressure to bear on local government. And the city council is trying to decide whether and how to change the existing laws to allow trucks to prepare food in the vehicle. Current law says food must be prepackaged and not altered in any way. 

This is a great little piece to bring together a trio of topics for your class.

Pencils

I know many of you use I, Pencil early in the course to explain interdependence, gains from trade and specialization. But now you can revisit the humble writing instrument when discussing market structure, competition and pricing. Today's edition of The Wall Street Journal has a fascinating story about the competition between the two largest and oldest pencil manufacturers. It opens the door for all kinds of discussion about the firm and even has this engagin video.



I would love to read your reaction.

Pricing Mysteries (with video)

Today's edition of The Wall Street Journal has an article (free content at this writing) that just begs to be used in economics class. It's about airline ticket prices. And it includes a very good video.

Airline ticket pricing has long been a mystery. Two people sitting in the same row in the same relative position (both in aisle seats or window seats) can pay significantly different prices. As we know, some of that is how soon before the flight did you buy the ticket, how long are you staying at the destination, etc.

But what about the basic cost and pricing structure of the flight. Why does it sometimes cost more to fly short distances than longer ones. Or why do two trips, of the same distance seem to have different price structures? Shouldn't marginal cost and marginal revenue fit in somewhere? This article tackles some of that. And if you're about to launch into pricing this could be helpful.

As we know, cost can be a determining factor. But it's not the whole story. Friedrich von Weiser provided some insights. His idea of alternative cost (later opportunity cost) gave more power to the consumer based on how they value the good or service, as opposed to the cost basis.

So the popularity of the destination will be a factor, as will the income of the consumer. But even those factors don't provide the whole answer. The number and type of competitors also play in. I recommend this article. Give it a read and see what you can do with it. I'd also welcome additional thoughts on its use to share with the readers.

P&G & Competition

For those of you getting ready to teach micro, there is a good article in yesterday's edition of The Wall Street Journal. The piece outlines how Proctor and Gamble (P&G) is competing with its rivals in a period of consumer reluctance. In the past, P&G depended heavily on marketing in selling its products to the upper end of the market. But times have changed. P&G is looking to increase market share and that means cutting prices to compete with other products. And lower prices mean smaller profits.

There are all kinds of things you can do with this article, from manipulating price to show changes in supply and demand to examining consumer and producer surplus. I'm trying to consider exactly where to use this article because it fits into so many places so well. What would you do with the article? Please share your thoughts.

Wal-Mart and Small Farmers

As long as I'm referencing NPR, let me talk about another story.  Last week, I put up a post on positive externalities attendant to a new Wal-Mart. Somehow, I missed this story from National Public Radio about Wal-Mart and its effect on local agriculture (HT to Carpe Diem).

My local Wal-Mart has been featuring produce grown in-state recently. And quite frankly, I don't expect it to be able to provide all kinds of local produce all year round - comparative advantage and specialization are operative concepts the last time I checked. But I am happy to see locally grown food at an affordable price in a convenient location.

That's what I call form, place and time utility. And when I can get all three at a good price, I will take advantage of it.

What are your thoughts?

Put a Cork (or Plastic Stopper) in It

This article from The Wall Street Journal (still free at this writing) has been in my inbox for a couple months. But it's a good one. It's about how the corks in wine bottles have increasingly been replaced by plastic stoppers. It's a good example of how firms mature and evolve, how substitution drives competition, and potentially about efficiency and creative destruction. It also has an interesting slide show.

Wal-Mart

For some reason, Wal-Mart has the ability to spark heated discussions. I know that many see it as a threat to the "small business", and others see it as an example of markets and competition. Here are a few interesting resources to use in discussing the issue, whether it's in economics, government, or when discussing community issues. I am personally neutral.  I shop at Wal-Mart and I shop at other stores (large and small), as well.  It depends on the product and/or service and the utility I get from my exchange.

The first resource was in today's edition of The Wall Street Journal (free content at this writing, but if that changes, try putting the headline in your browser). It was also the impetus for this post, as it made me look for a few more items that I had read about or heard. The article reminds me of a quote from Adam Smith,

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In this case, it may not be a contrivance to raise prices. But it appears to be an aversion to lowering them.

The second resource is a podcast on EconTalk. Host Russ Roberts did an interview with Charles Platt who wrote an interesting piece for The New York Post. It includes links to some other related resources.

This last one is a brief piece on some research done by an economist at the University of Illinois at Chicago. This research was done in the city of Chicago and would seem to support the contention that Wal-Mart has a detrimental effect on small neighborhood businesses. However, I question the data. The timing is largely coincidental with the current recession. Therefore, I would question whether the closings were solely attributable to Wal-Mart.

Feel free to comment.

***UPDATE***
Here is another blogger who has trouble with the UIC research piece.  And he does a much better job of raising objections than I did.

Do Volunteers Steal Jobs?

"Low wage workers steal jobs." This argument is one we have all heard. It gets applied to issues such as immigrant labor, off-shoring, even unionization. The prima facie argument is compelling. Someone willing to work for a lower wage replaces the individual working at a higher wage. It isn't fair, etc., etc.  That's what made this post on Econlog so very interesting. The author of the article referred to in the post, indicates that there was suspicion about the motives and effect of volunteers in the aftermath of the Haiti earthquake. Locals thought the workers were "stealing their jobs" by agreeing to work for less than the local wage. When informed that they were doing it for free, a common response was that the workers must be getting paid elsewhere.

The type of thinking exhibited by the villagers may be questionable, but is it a logical extension of the arguments we hear related to immigrants, off-shoring, etc.? If it is true, shouldn’t anyone from the outside who is involved in the cleanup after a catastrophe be looked upon with suspicion? The motives of numerous charities should be questioned because the workers are doing things that locals could be doing themselves and possibly getting paid for.

Would it also apply to help extended during catastrophes? If "outsiders" come to help fight forest fires or build levies against flood waters, aren't they taking work from those in the community whose job it is (or could be) to perform those services?

I'd be interested in reading your reactions. If you've read your Adam Smith (both The Wealth of Nations and The Theory of Moral Sentiments), how do you think he would respond?

Agriculture, Choices & Poverty

I really enjoy it when one resource becomes even more relevant due to another item popping up.

The topic for this post is agriculture, choices and poverty. My first recommendation is this research article on the Voxeu web site. It's a basic study of the effect on agricultural trade barriers on global poverty. The imposition of trade barriers is a choice, frequently a political one, which has far-reaching economic effects. There are often domestic benefits for the country imposing the barriers. And there are often foreign costs that are not considered.

The authors of the study feel that the costs to global poor are significant. Their conclusion states that removal of agricultural trade barriers could lower global poverty by 3%. While that may not sound like much, in absolute terms it is more impressive.

According to their research, removal of agricultural trade barriers will increase demand for the produce of the global poor who live in rural areas and depend on agriculture for their livelihood. The study recognizes that increased demand also can raise the price of staple foods these same poor need to survive. But it also posits that removal of global barriers, while providing higher prices for food for export can have beneficial effects on food prices within the various countries, and on wages. Overall, the Voxeu piece is a worthwhile read.

The second resource also deals with agriculture, poverty and choice. It deals with the "buy local" choice. This article in Foreign Policy magazine (HT to Division of Labour) shows how decisions to "buy local" can have an impact on global agriculture markets, again affecting the poor in other countries. It has some amazing photographs, as well.

This third article, from today' edition of The Wall Street Journal gets into the definition of a farmer's market. In my opinion, it also talks about how market drive competition and how competition reduces costs. If you’ll pardon the pun, it’s just some "food" for thought. Please share yours (not your food, your thought).

Wal-Mart Effect?

A few days ago, I ran across this article from The Washington Post on Wal-Mart's impact on labor and environmental standards in China. Then yesterday, I ran across this article from The Atlantic (HT Arts & Letters Daily) on how Wal-Mart is having an impact on organic and locally grown foods.

Given the way the retailer is so often vilified, I found these to be rather enlightening and refreshing. But that's just my opinion. Please share your thoughts about the articles.

Competition Is a Great Thing...

provided it doesn't affect us. An excellent post on Carpe Diem shows how groups may react when competition induces change. (My family has used these clinics a couple of times. We have no complaints.)

As always, your comments are welcome.

Monopolies and Other Games Businesses Play

A regular reader points out that there is a takeover in the making. Simon Properties is trying to buy General Growth Properties. Not familiar with those names? Simon Properties is the largest owner of shopping malls in the U.S. The main article (free at this writing) in The Wall Street Journal features a good video.  And here’s the story as reported by ABC News.  And the same story covered by The Economist.

There are other items that can be used that examine specific aspects of the issue. This blog entry from The Wall Street Journal lists some of the anti-trust issues. While this piece asks a basic question about the viability of shopping malls in an age increased online shopping.

I suspect there are lots more. Regardless, if you’re teaching about monopolies and such, and looking for relevant material, this is good stuff. (Thank you to my Indiana contact for the tip.)

Something New on Globalization

Here are a couple of links that you may find interesting. I did. The first is from Real Time Economics, one of the blogs of The Wall Street Journal. It highlights some recent research that sees a correlation between trade and peacetime. From reading the post, I get the impression that the authors of the study feel that the direction may run from peace to trade.

But I suggest that since it is correlation and not causation, it's possible it may run the other way. Trade promotes peaceful relations. I've read a few things that would suggest this, either directly or by implication. It's certainly worth thinking about.

The second link is to National Public Radio's Planet Money blog. The podcast (about 15 minutes long) is about globalization and the search for spices in the Middle Ages, and features a discussion with Tom Standage, author of An Edible History of Humanity. One of the more entertaining aspects of the interview was the discussion about the early Arab monopoly on the spice trade. It appears to me that the it rested (as many monopolies do) on an information asymmetry. And it was closely guarded.

And for those of you teaching World History, here's a bonus cut from All Things Considered that you may find valuable.



I look forward to reading your reactions.

Santa vs. WTO

Thanks to folks at the Real Time Economics blog of The Wall Street Journal for this.  I hope you enjoy it, and that it provides some food for thought, or at least reflection on the holidays.

As always, your thoughts are welcome.

World without Wal-Mart

The students in my global economics course have a class blog to contribute to as part of the course expectations. One of them posted this interesting piece about "Life without Wal-Mart" over the weekend.

Compare the list of innovations to Schumpeter's definition of entrepreneurial activity (briefly explained in this previous post) and see how they match up. Let me know what you and your students think.