Friday, June 15, 2018

What is the elasticity of demand for Whole Foods?

After Amazon bought Whole Foods, there was increase in foot traffic (a proxy for sales):
Whole Foods’ foot traffic has increased roughly 3% year over year in each of the quarters since Amazon bought the chain, according to an analysis by Thasos Group, which uses mobile-phone location data to determine trends. That came after two straight years of stagnating sales at the chain before the deal. Higher foot traffic improves a retailer’s likelihood of sales, and the figure can be a used as a proxy for a chain’s health. Of 11 supermarkets analyzed by Thasos, Trader Joe’s and Sprouts customers were most eager to try out Whole Foods after the acquisition to potentially check out subsequent price cuts, with 8% of their regular shoppers visiting the rival chain.

Presumably caused by a decrease in price:

Amazon.com Inc. AMZN -0.61% on Monday put itself in the unusual position of being a first-mover on price cuts when it slashed the sticker price on more than 100 items at Whole Foods Market Inc.,many by more than 30%. 

To calculate the implied price elasticity of demand for Whole Foods, divide the quantity increase by the price decrease:

 elasticity = (%change in Q)/(%change in P)=(+3%)/(-30%) = -0.1

Demand seems very inelastic.  If Amazon were trying to maximize profit on its Whole Food sales, it should have raised price, because revenue would have gone up, and quantity, and costs would have gone down.  In fact, the stock price reactions seem to underscore the unprofitability of the move:

Investor concern that Amazon’s price cuts at Whole Foods will trigger a price war led to a stock selloff among traditional grocers Monday, continuing last week’s slide. Sprouts Farmers Market Inc.’s stock tumbled 10%, while Natural Grocers by Vitamin Cottage Inc. was down by more than 2%. Kroger, the largest U.S. grocery chain by stores and revenue, slipped 1.4% before largely recovering, while Wal-Mart Stores Inc.’s shares slid slightly.

What seems more plausible is that Amazon is applying its traditional pricing algorithms to the acquired Whole Foods stores.
Amazon typically relies on algorithms that scrape competitors’ prices before automatically matching or narrowly undercutting them on its website. It focuses on items that are most popular on the site and that drive traffic, according to former executives in Amazon’s retail divisions. That gives the retail giant a reputation for having the lowest prices, part of its strategy of driving more shopper traffic.

Thursday, May 31, 2018

CompetitionToolBox.com

New web apps designed to teach oligopoly models to lay people.  Just as a child can learn to throw without knowing Newton's Laws of motion, so too can an attorney learn how the models work by using them. 

Friday, May 25, 2018

MoviePass, Bundling and Adverse Selection

The Wall Street Journal reports that MoviePass is offering subscribers the opportunity to see an unlimited number of first-run movies in theaters. Since the marginal cost of another patron is about zero, this sort of bundling can really increase value to consumers. If implemented appropriately, MoviePass could extract some of this additional value. But there may have been a couple problems with the implementation.

First, the monthly subscription is just $9.95 per month. Since the average movie price is just shy of this amount, a customer who sees two or more movies per month comes out ahead. MoviePass reimburses theaters at face value, meaning that they lose money if customers view more than one movie per month. The plan was to generate additional revenue through targeted advertisements, but this does not appear to have filled the gap.

Second, the type of customer who would take advantage of this deal is likely to be an enthusiast who views well over one movie per month. That is, adverse selection may be severe. One investor quipped:
"I'm saving $70 a month going to the movies and losing thousands investing in the company that's letting me do that," lamented Mr. D'Ariano.

The end result is that the parent company has lost a lot of market value, "... MoviePass lost $98.3 million on $48.6 million of revenue in the quarter ended March 31 ..." Ouch!

Saturday, May 19, 2018

The hidden benefits and costs of Corporate Social Responsibility

Another fabulous pointer from MarginalRevolution:

John List started his own firm and ran randomized control trials in different cities (varying the wage and the CSR or the "corporate social responsibility" mission of the firm). He found that it was easier to attract workers to the CSR mission (adverse selection):

...the C.S.R. job attracts about 33 percent more in application rates, so ... “Rather than paying someone $15 instead of $11, I can just say I’m a C.S.R. firm and pay them $11 and I’m going to get the same ... volume of recruits.”

And that these workers were 25% more productive on average.  However, they were also less ethical, 24% more of these workers were found to be cheating on the tasks that they were being paid to do (moral hazard).  Apparently, having a CSR mission gives the workers a moral "license" to behave less ethically.  

Friday, May 18, 2018

Markets for blood

From MarginalRevolution:

It’s a very odd “ethical policy” that leads Canadian provinces to ban paying Canadians for plasma but then import paid plasma from the United States. I am one of the signatories (along with Al Roth, Vernon Smith and Gerald Dworkin among others) of a letter that argues for the efficiency and ethics of allowing compensation for blood plasma donation

Squeezing Scalpers is Backward Integration

The WSJ reports that scalpers are less important to Taylor Swift's current "Reputation" tour. About 3% of the tickets find their way to stubhub versus the usual 30%-50%. Previously, scalpers would purchase tickets to performances by high demand artists and resale these tickets at a markup. In essence, the promoter "outsourced" the task of price discrimination to scalpers. Scalpers were able to capture a margin but bore the risk of unsold seats. Since there is virtually free entry into scalping, I suspect they earn very small economic profits. Promoters would be happy with this if scalpers were better at price discrimination and so were able to pay higher prices up front.
"The primary market has been ceding pricing control to secondary markets," said David Goldberg, a former senior Ticketmaster executive.

But CRM technology has come to concert promotion. Taylor Swift's promoters now have the edge in ferreting out which fans are less price elastic.
For the current Taylor Swift tour, would-be concertgoers were encouraged to register for Ticketmaster's Verified Fan program months before tickets went on sale. They could boost their standing in the ticket queue by watching music videos and purchasing the "Reputation" album or merchandise. Users then received codes that allowed them the chance to purchase discounted tickets over a six-day presale period.

By exploiting this information, they can publicize discounts to hardcore fans while raising overall prices.
The best seats--some with added VIP perks--cost $800 to $1,500 at face value for a given show, with those immediately behind them at $250 each. Spots in the back of the house go for about $50. Regular tickets for Ms. Swift's tour three years ago cost about $40 to $225, according to Pollstar data

Dress it up as cutting out the middleman but this tour "has already grossed 15% more." This is because her organization is now even better at price discrimination than these middlemen had been.

Tuesday, May 15, 2018

Jobs Elasticity

Seattle recently voted to institute a "head" tax estimated to average $540 per year per employee. Amazon cited this as a reason to halt construction on an office building in Downtown Seattle estimated to bring an additional 7,000 jobs. Or the demand for labor is downward sloping.

But is this just posturing or might Amazon actually scrap the project? A friend did some calculations. Amazon has about 45,000 employees in Seattle. Amazon paid $250 million in state and local taxes in 2017. The tax would add about $24 million in new taxes in Seattle, So 7,000/52,000 = 0.132 and $45m / $250m = 0.18 making the elasticity 0.134/0.18 or 0.74. This estimate seems to me to be within the realm of possibility. The threat appears to be more than mere "cheap talk."

Hat tip: John McMillan

Monday, May 14, 2018

2018 Top 100 Economics Blogs

List is here:

MANAGERIAL ECON

Managerial Econ is the perfect blog for anyone wanting to solve managerial problems and make business decisions using economic principles. Hosted by the authors of the popular managerial economics book Managerial Economics, Managerial Econ is the perfect blend of business and economics and is highly recommended for those with an interest in economics and the managerial aspects of business.

Friday, May 11, 2018

Dog invents currency, convinces humans to accept it

The problem with fiat currency, backed by nothing but the faith that it is valuable, is that the monetary authority will print more of it.  This leads to an erosion of faith which shows up as inflation.   The dog pictured above has invented his own currency.
Early on in Negro's tenure at the school, he came to be aware of the little store on campus where students gather to buy things on their breaks; sometimes they'd buy him cookies sold there. 
This, evidently, is where the dog first learned about commerce — and decided to try it out himself. 
"He would go to the store and watch the children give money and receive something in exchange," teacher Angela Garcia Bernal told The Dodo. "Then one day, spontaneous, he appeared with a leaf in his mouth, wagging his tail and letting it be known that he wanted a cookie."

The dog has apparently have found a way to credibly commit to not printing money to finance deficit spending. Venezuela could learn something from him.