Friday, June 29, 2018
Greg Mankiw on the Poverty Trap
Tuesday, June 26, 2018
Longer Trains
The WSJ reports that freight trains keep getting longer.
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:
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.
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):
Presumably caused by a decrease in price:
To calculate the implied price elasticity of demand for Whole Foods, divide the quantity increase by the price decrease:
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:
What seems more plausible is that Amazon is applying its traditional pricing algorithms to the acquired Whole Foods stores.
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:
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, June 14, 2018
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:
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!
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 (positive selection):
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.
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 (positive 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.
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.
By exploiting this information, they can publicize discounts to hardcore fans while raising overall prices.
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.
"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.
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