California AG wants retailers to compete with manufacturers

The California Attorney General's office sued a small cosmetics company for stoppiing its own retailers from selling its products online at a discount.

Instead, prices must be set independently -- and competitively -- by distributors and retailers. Ostensibly this is supposed to help consumers, but as we know from Chapter 23 of our textbook, when two firms selling complementary products compete with one another, price is likely to rise.  Note that here the two complementary products can be thought of as the wholesale good and retail services required to sell it.

This is called the "double marginalization" or "double markup" problem, and is addressed by contracts like the one outlawed by the attorney general.  These contracts are one way to align the incentives of retailers with the goals of the manufacturer.

Another aspect of the retailer/manufacturer incentive conflict is brought up by attorney Jeffrey Zuckerman in the online discussion:

It would be hard to imagine products more in need of protection from free riding, and therefore more legitimately subject to RPM, than skin care products from a small company.  The California AG probably picked on Bioelements because they are too small to fight back.  Heck, I might have been willing to defend the company pro bono, just to keep the California AG from getting an undeserved victory.  

Can anyone on this list explain how consumers as a group have been injured because Bioelements imposed RPM on the Internet distributors of its "cosmesceuticals"? 

Here Mr. Zuckerman is referring to the promotional and retail services undertaken by brick and mortar retailers.  The manufacturer has an obvious incentive to stop internet retailers from undercutting the brick and mortar price, and "free riding" on the promotional efforts of brick and mortar retailers.

Is the stock market over-valued relative to bonds?

The P/E ratio of the previous post can also be expressed as a "yield" (E/P) so that it can be compared to ten year treasury bonds. Using this metric, stocks (in blue) look historically cheap.

Stock yields are historically lower than bond yields because stocks have a growth premium built in.  The growth premium should drive up the stock price, and drive down the yield.  Bonds have no such upside potential.

However, stocks also have a risk premium built in because they are typically riskier than bonds.  The risk premium should drive down the price, and raise the yield.  The relatively high stock yields in 2010 suggest that risk premium is outweighing the growth premium.

The difficulty of course, is that dividend yields are affected by inflation, but stock yields are not (because both denominator and numerator are affected).

Slide from Roger Brinner of the Parthenon Group.

Is the stock market over-valued?

Shiller's famous P/E graph, updated courtesy of Shayne & Co.

Auctions in Overbooked Seats

Delta will start collecting bids for overbooked flights earlier so as to better operate the auction for these seats. Airlines already "auction" these seats at the gate by offering cash or coupons for later flights. Now though, when you check into an overbooked flight, at the airport or online, you will be prompted for a bid amount. By starting earlier, they can attract more bidders. And by starting before the transactions cost of going to the airport have been sunk, they can expect lower bids.

Why do we have still have stock pickers?

..selling actively managed funds to consumers when 2/3 of them are beaten each year by index funds, and a small minority beat the market each year?  Burton Malkiel, author of "A random walk down wall street," has the answers.

Why is Egyptian debt suddenly so cheap?

Because you don't want to be holding Egyptian debt when the government falls:

the cost of insuring Egyptian sovereign debt against default rose sharply, with five-year credit default swaps rising 40 basis points to 320 basis points, an 18 month high, according to Markit.

On the other hand, markets often over-react to crises, so this may be a buying opportunity.

Bad Gift Insurance

Joel Waldfogel's "The Deadweight Loss of Christmas" always makes for fun classroom discussion. The main point is that recipients of gifts often value a gift less than the giver did or even less than the giver paid. In a survey, recipients valued every $1 of gift cost at $0.80. Or, if they had sent cash instead, they could send 20% less and we would be just as happy. Some have argued that the difference represents a social loss to society. More to the point, it represents a miss-allocation of assets and, thus, a profit opportunity.

Amazon has stepped in and patented a potential solution. We know that there are good gift givers and bad gift givers. For example, your Aunt Mildred's proclivity for giving fruit cakes and ugly clown figurines makes her a known poor gift giver. Every year, you bear the expense and hassle of returning her gifts. Amazon proposes to intercept Aunt Mildred's gift before it is sent and convert it into cash (or a near equivalent) for you. You must tag Aunt Mildred as a gift offender allowing Amazon to convert her expenditure on bad gifts into a gift card. Of course, this does affect the whole idea of gift giving - Miss Manners does not approve.

Rent control did what the US bombers never could

...destroy Hanoi: Great quote former foreign minister of the Socialist Republic of Vietnam:

"Addressing a crowded news conference in the Indian capital, Mr. Thach admitted that controls...had artificially encouraged demand and discouraged supply...so all the houses in Hanoi had fallen into disrepair.

"The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy," he said"

Hat tip: Jeff Smith

Does cellphone use cause car accidents?

Two economists exploited a clever natural experiment by comparing auto accidents in California just before 9pm and just after 9pm.  What makes 9pm special is that cell phone rates go way down at 9pm.  Using data from cellular towers, the economists saw an increase in cellular calls, but no increase in auto accidents.  They offer three explanations:

1. People who start talking while driving become more cautious;
2. Behavior does not change; or
3. Although cellphones clearly distract some drivers, they may also help other drivers stay alert.

What is a "living wage?"

It sounds nice, but laws mandating them have a pernicious effect:

...laws which demand that those companies which contract with government pay workers a ‘living' wage, often defined as substantially above minimum wage. One purpose of these laws is often to make outsourcing of services so expensive that it doesn't pay for government to contract with outside firms who pay market wages. Indeed, a living wage manual produced by labor groups and advocacy organizations in the 1990s to promote campaigns across the country put it simply when it said: "The Living Wage undercuts the incentive to privatize."