Friday, June 29, 2018

Greg Mankiw on the Poverty Trap

Mankiw's graph shows that as you earn more income (plotted on the horizontal axis), the amount of money you receive (income - taxes + subsidies) is does not increase, at least for lower-income earners.  Until your earned income hits about $40,000, the extra money you receive from earning more is near zero.

Tuesday, June 26, 2018

Longer Trains

The WSJ reports that freight trains keep getting longer.
The freight train is now on track to stretch up to 3 miles long, with 200 cars or more.

CSX Corp., for instance, in April said its average train length rose 5% in the first quarter from a year earlier, a signal to investors and analysts that the railroad is gaining efficiency.

The relative sizes of fixed costs and marginal costs seem to be behind this. Long trains mean fewer, more efficient trains which save on fuel and crews. This also means fewer but longer delays at crossings, perhaps better for residents to plan around but worse unplanned trips by, say, emergency vehicles.

There are challenges:
Operating trains that are double the length of standard size trains involves mastering the distribution of weight and pulling force. The longest, heaviest trains may have four locomotives in front, two in the middle and two at the end.

Online Sales Tax and Vertical Integration

Last week, the US Supreme Court reversed earlier decisions on the collection of sales tax by online retailers. Previously, states could not tax a company that had no physical presence in the state. Now, states can collect sales tax on retail items sent to residents of the state.

Large online retailers had a presence in almost all states and so collected state sales taxes from all customers. Mom & Pop venders may have sold across state lines but usually only collected from local residents. Mid-sized online retailers, however, had to weigh the option of expanding into a state with the 6-8% higher costs that their customers would have to pay. Avoiding those costs, likely affected some facilities purchase decisions. Now that this  tax can no longer be avoided, I expect more of the mid-sized firms to vertically integrate into states where they had been hiring third-party vendors.

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, ...  That came after two straight years of stagnating sales at the chain before the deal. 

Presumably caused by a decrease in price: 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.