Bargaining stalemate between Hostess and its Union

It appears that Hostess has a credible threat to shut down unless the Union makes concessions.

Hostess, based in Irving, Texas, has already reached a contract agreement with its largest union, the International Brotherhood of Teamsters. But thousands of members in its second-biggest union went on strike late last week after rejecting in September a contract offer that cut wages and benefits. Officials for the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union say the company stopped contributing to workers’ pensions last year.

But listen to the video below, and hear the fears of the Bakers Union, that if they make a concession to Hostess, other companies would want similar concessions.

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Why do Brits drink more than Yanks?

England has a drinking problem:

Since 1990, teenage alcohol consumption has doubled. Since World War II, alcohol intake for the population as a whole has doubled, with a third of that increase occurring since just 1995. The United Kingdom has very high rates of binge and heavy drinking, with the average Brit consuming the equivalent of nearly ten liters of pure ethanol per year.

It’s apparent in their hospitals, where since the 1970s rates of cirrhosis and other liver diseases among the middle-aged have increased by eightfold for men and sevenfold for women. And it’s apparent in their streets, where the carousing, violent “lager lout” is as much a symbol of modern Britain as Adele, Andy Murray, and the London Eye.

The US, is in much better (?) shape:

A third of the country does not drink, and teenage drinking is at a historic low. The rate of alcohol use among seniors in high school has fallen 25 percentage points since 1980. Glassing is something that happens in movies, not at the corner bar. 

Part of the difference is the inefficient 3-tiered distribution system in the US, which is not only much less efficient at delivering beer to consumers, but also results in so-called "triple marginalization," each stage of the vertical supply chain takes its own markup, with the result that the final price is much higher than would be charged by a vertically integrated producer-distributor-retailer.

...most states, requires that the alcohol industry be organized according to the so-called three-tier system. The idea is that brewers and distillers, the first tier, have to distribute their product through independent wholesalers, the second tier. And wholesalers, in turn, have to sell only to retailers, the third tier, and not directly to the public. By deliberately hindering economies of scale and protecting middlemen in the booze business, America’s system of regulation was designed to be willfully inefficient, thereby making the cost of producing, distributing, and retailing alcohol higher than it would otherwise be.

Why are cows leaving California?

It is not because of high taxes or unfunded pension liabilities.  Rather it is due to the low regulated prices that cheese producers get to pay. 

Some 100 California dairy farmers are shutting their doors this year, according to the Milk Producers Council, a group representing dairy farmers.

Those of you who read this blog know that markets would fix the problem, leading to higher prices which would reduce demand from processors and increase supply from dairies.  However, in California, they are using regulators, courts, and the legislature, rather than markets, to set prices:

Last week, four groups representing dairy farmers ... filed a lawsuit in August against Karen Ross, the secretary of the California Department of Food and Agriculture, which sets the price that cheese makers pay for milk.

But dont worry, help is on the way.  Last month, Ms. Ross "assembled a task force of producers and processors to study the issue."

I eagerly await their report. 

Why are takeover premia so big?

Its all about the Benjamins:

Here is a really simplified example. Suppose you are a large company generating $1B in revenue, and you have a market cap of $5B. You want to build an important new product that your CTO estimates will increase your revenue 10%. At a 5-1 price-to-revenue ratio, a 10% boost in revenue means a $500M boost in market cap. So you are willing to spend something less than $500M to have that product.

Why shortages appear

Blame prices that are not allowed to adjust:

Hit by a cascade of complaints from consumers, the New York Attorney General’s Office launched a probe on Monday into price gouging in the state in the wake of Hurricane Sandy.

The complaints centered on gas-price hikes but also include reports of jacked-up prices on everything from emergency supplies like generators to higher hotel rates and loftier prices for food and water.

 “Our office has zero tolerance for price gouging," NY Attorney General Eric Schneiderman said in a statement. "We are actively investigating hundreds of complaints we've received from consumers of businesses preying on victims of Hurricane Sandy, and will do everything we can to stop unscrupulous individuals from taking advantage of New Yorkers trying to rebuild their lives."

Not only do higher prices cause shortages to disappear (by encouraging conservation on the demand side, and increases in supply), but they also give consumers and firms an profit motive to find ways to alleviate shortages in the future. 

Halloween Candy Markets

Know the rules of Halloween candy trading

What happens when States incur too much debt?

The NY Times takes a look at Illinois:

For years, Illinois has racked up billions in public debt to plug budget holes, pay overdue bills, and put money into its mismanaged pension funds. And for the people who live there, this has resulted in decrepit commuter trains and buses, thousands of unsound bridges, 200 hazardous dams and one of the most inequitable public school systems in America.

Stossel on subsidizing risks

The video illustrates a couple of ideas:

1. From Chapter 2:  subsidies destroy wealth, in this case, by encouraging activities whose cost is bigger than their benefit. 
2. And from Chapter 20:  If you make things safer, people take more risks. 

Aussies Find Cosmetics Firm Guilty of RPM

The Australian Competition and Consumer Commission (ACCC) has clamped down on so-called "resale price maintenance" (RPM) by Eternal Beauty Products. In this case, the cosmetics maker pressured online retailers to either sell goods at certain prices or risk being cut off altogether. Most countries have had some sort of anti-RPM law on the books. At first blush, it seems quite obvious that that a manufacturer requiring a retailer to set higher prices must not be in the public interest. Until, you ask a simple question, "Why would manufacturers do this?"

1. If the manufacturer was a monopolist, it might be a way of getting higher final prices. But, why not simply raise the wholesale price? Given the wholesale price, the manufacturer should want as low a retail price as possible to sell as many units as possible. Anyway, in this this case, like most, the manufacturer was one of many competitors.
2. If the industry was oligopolistic, the manufacturers may be collectively using retailers to enforce higher prices. This could be a way to reduce rivalry. But then all cosmetic firms would be party to the deal and they would have to impose price restraints on all retail channels. This appears to have been far from the case.
3. If the product was new or differentiated and the target market was poorly informed about the product's characteristics relative to competitors, the manufacturer may want to encourage point-of-sale (POS) services. Retail sales associates may be uniquely positioned to demonstrate why this product might be preferred. But this imposes costs on the retailers who perform these POS services. They may be willing to do so for a higher margin. But not if some online retailer offers the same product without the POS services at a discount. Customers will may make an initial purchase with the full service retailer and then shift orders to the cheaper online vendor. In this case, no retailer will be willing to offer the POS services and suffer the free-riding by online discounters. Without POS services, the product fails. To counter this, the manufacturer bans discounting by setting a minimum retail price that includes enough of a margin that retailers want to offer the POS services. In this theory of RPM, customers benefit from small manufacturers bringing new and innovative products to the market. Too bad the ACCC got in the way.

Group Incentives: Teacher pay

An interesting application of group incentives was examined in a new working paper by Scott A. Imberman and Michael Lovenheim called "Incentive Strength and Teacher Productivity: Evidence from a Group-Based Teacher Incentive Pay System." The incentive scheme was for groups of teachers teaching the same subject within a grade and school. One problem with group incentives is free-riding. But different teacher assignments means that the incentive can be stronger for teachers who are responsible for the outcomes of more of the students. So, as a teacher's share of students in a particular school, grade, and subject combination, the incentives get stronger. From their abstract:

We find that student achievement improves when a teacher becomes responsible for more students post program implementation: mean effects are between 0.01 and 0.02 standard deviations for a 10 percentage point increase in share for math, English and social studies, although mean science estimates are small and are not statistically significant. 

While these effects seem small, they are bigger than are found in many previous studies. So, if the incentive dissipates for larger groups, why use group incentive rather than measuring performance at the individual level? I can think of a few reasons (and maybe you can think of more):

1. Individual incentive would lead teachers to try to "cherry-pick" students. These could just be the better students if raw test average is the performance measure or those thought to be able to improve the most if change in score is the metric.
2. To better sort students into classes. Students differ in abilities as well as other characteristics (e.g. unruly versus well-mannered). Some teachers are better with one type of student than another (e.g., former drill sergeant). The group of teachers all benefit from better matching students to teachers.
3. Spillovers within a group. Teachers have heterogeneous abilities and no one likes to be 'corrected' by a colleague. But now there is a stronger incentive for the better teachers to share their methods with those who can improve.
4. Demonstration effects across teacher groups. Other groups of teachers can observe the successful groups and learn.

 So it might be worth weaker group incentives so as to address these issues.