Apple wanted a most favored nation clause

The WSJ reports that has appealed a decision that it fixed prices on ebooks. What caught my eye was a reference to a most favored nation clause.

SUMMARY: On Monday, an appeals court is scheduled to consider whether Apple's pricing agreements with e-book publishers amounted to a deft market maneuver or an illegal conspiracy. "Apple's agreements ceded the power to set prices to the [five major] publishers.... A key provision of the contracts required the publishers to give Apple's store the best deal that they gave anyone on e-books. That assured the publishers would force Amazon to change its business model, otherwise they would suffer heavy losses matching Amazon's discounted prices-$9.99 for most best sellers-in Apple's e-book store, prosecutors said. Prices on many e-books increased immediately." Related article: Justice Department lawyers faced aggressive questioning from judges reviewing a finding that Apple conspired with book publishers to raise the price of electronic books in 2010.

CLASSROOM APPLICATION: Students can evaluate whether "most-favored nation" clauses in contracts result in higher or lower prices. "So-called most favored-nation clauses are common in industries ranging from health care to television to financial services. Such clauses, like those in the Apple agreements, guarantee the recipient the lowest prices or rates charged to any buyer. In theory, such arrangements encourage competition and lower prices for consumers, but in practice they sometimes establish a minimum price, according to antitrust lawyers and government officials."

QUESTIONS: 
1. (Introductory) What are "most-favored nation" requirements? What are possible motivations by Apple to place most-favored national clauses in their contracts with book publishers?

2. (Advanced) What are the potential effects on competition among manufacturers of most-favored nation requirements between retailers and manufacturers?

3. (Advanced) What are the potential effects on retail prices of most-favored nation requirements between retailers and manufacturers?

Reviewed By: James Dearden, Lehigh University

Museums begin to engage visitors to capture and to mine data

The article in the WSJ reports that museums are starting to use tracking devices and digital social engagement to collect data for consumer research.

To hedge or not to hedge?

Southwest won big in 2008 when it hedged. Delta Airlines lost in 2014 when it hedged.

Why are wireless prices decreasing?

This article from the WSJ reports that wireless "carriers are waging a price war to attract new customers" and that "churn", the movement of a customer from one carrier to another, has increased. 

SUMMARY: AT&T, Verizon say they need to work harder to expand subscriber counts; T-Mobile unveils a new deal.

CLASSROOM APPLICATION: The article prompts the question about the factors that are causing lower prices among wireless providers. While the article reports on the competition to attract new customers, it does not examine the possible causes. Two factors about industry structure that affect equilibrium prices are quality differences among wireless providers and costs to consumers of switching providers. Students can discuss whether shrinking quality differences among providers and reductions in switching costs leads to lower equilibrium prices.
QUESTIONS: 
1. (Advanced) What is the effect on a price war among wireless carriers on whether consumers switch carriers? What is the "prisoner's dilemma"? In what sense is a price war among wireless carriers like a prisoner's dilemma?

2. (Advanced) Research question. What factors are causing wireless carriers to engage in a price war?

3. (Introductory) Research question. Why is T-Mobile gaining customers?

Reviewed By: James Dearden, Lehigh University

Online sales

This article in the WSJ discusses the profitability of online sales. It reports that shoppers continue to move to online purchases. It reports that many traditional retailers have lower profitability on online sales than in their stores and that "Primark, the European discount retailer that plans to open eight U.S. stores, has shunned online retailing altogether because it deems it unprofitable". 

Analyze this:
"If the e-commerce business was inherently so much more profitable, pure e-commerce companies would have higher margins," said Simeon Siegel, an analyst with Nomura.

"I don't care if customers buy online or in store," he said. "We're focused on sales."

"Another factor weighing on e-commerce margins is that online sales have a higher degree of variable costs." 

Questions to consider:

1. Do traditional retailers have a competitive advantage in online sales? If not, what is the future of traditional retailers? If so, what is the future of Amazon?

Coase Theorem in action

This ad is a good illustration of how the Coase Theorem works.

Price discrimination on airplanes

This screenshot is a great example of price discrimination.

Supply and demand in action in the chocolate market

This article from the Washington Post reports that the supply of chocolate has decreased, the demand for chocolate is increasing, and *surprise, surprise* the price of chocolate in increasing.

Hachette and Amazon reach agreement

This article in the NYT reports that Hachette and Amazon reached agreement on terms. Details are fuzzy.

See this earlier post for more details.

Economic prosperity in Aftrica

In this opinion published in the Richmond Times-Dispatch, Walter Williams argue that the solution to Africa's economic woes is more economic freedom. 

Does the minimum wage spur automation?

This opinion in the WSJ argues that on effect of the minimum wage is for employers to substitute capital for labor.

Can you trust consumers?

This letter to the editor in the WSJ argues that government interference in otherwise free markets may protect consumers from mistakes that they would otherwise make.

Wal-Mart considering price match

This article from the WSJ reports that Wal-Mart is considering expanding its price-match program to include online sellers as well as bricks-and-mortar stores. This article from Yahoo! has more details about the Savings Catcher program.

TOPICS: Pricing

SUMMARY: Wal-Mart is testing a program to match online prices from rivals like Amazon this holiday season, a move that could make the discounter more competitive but cut into profits.

CLASSROOM APPLICATION: Students can evaluate two aspects of Wal-Mart's price-matching strategy. First, they can examine the factors that caused the company's to switch its pricing strategy from not matching online prices to matching online prices. Second, students can study whether the price-matching strategy is anti-competitive in the sense of resulting in higher posted prices.

QUESTIONS: 
1. (Introductory) Why did Wal-Mart introduce its online and mobile tool Savings Catcher?

2. (Advanced) Will Wal-Mart's price-matching strategy lead to Amazon setting higher prices? Evaluate the effect of the introduction of Wal-Mart's price-matching strategy the increase in Amazon's profits from lower the price it sets for a particular product?

3. (Advanced) What is the effect of the quantity of Amazon's sales of a particular product on Wal-Mart's profit from shifting from not matching to matching Amazon's prices?

Reviewed By: James Dearden, Lehigh University

Natural gas prices are falling

This article from the WSJ reports that the price of natural gas is falling at a time in the year when it typically starts to increase.

SUMMARY: When cold weather looms across the U.S., natural-gas prices usually rise. This year they are falling, after a record production boom nearly replenished stockpiles left at their lowest since 2003 by last winter's freeze.

CLASSROOM APPLICATION: Students can use supply and demand to examine the effects of shifts in both demand and supply on the equilibrium price of natural gas. Also, they can compare factors, such as weather, that have differing effects on the prices of two major energy sources: natural gas and oil. Lastly, they can examine how bottlenecks in supply chains affect prices.
QUESTIONS: 
1. (Advanced) How do weather forecasts affect the price of natural gas? Why does the weather have a greater effect on the price of natural gas than it does on the price of oil?

2. (Advanced) During periods of high demand for natural gas, how do bottlenecks in the natural gas supply chain affect the price of natural gas?

3. (Introductory) Why did prices for prices for natural gas last week reach to their lowest point of 2014?

Reviewed By: James Dearden, Lehigh University

To buy the bundle or not to buy the bundle?

This article from the WSJ is a great example of the effects of (un)bundling. 

SUMMARY: A future where television viewers subscribe to each channel they want could make the average cable TV bill-which hovers about $90-seem like a bargain.
CLASSROOM APPLICATION: Instructors can use the article to compare bundling and a la carte pricing. They can present bundling as a means to extract consumer surplus and also possibly as a means to improve economic efficiency (by providing goods should be, but are not, provided under a la carte pricing).
QUESTIONS: 
1. (Advanced) Consider a simple case in which two people can subscribe to a cable network, ESPN for example. Person 1 values the network at $10 and person 2 values it at $20. The total cost of providing the network to either one or two people is $25. Is it efficient to provide the network? Suppose a cable company charges each person the same price for the network. What is the minimum price for which the network would be provided? If the network is provided a la carte at this price, would both people subscribe to the network? Suppose the network is bundled with others in a cable package. In doing so, the price of the bundled package would increase by the minimum price needed to provide the network. Is it possible that both people would subscribe to the bundled package? If so, would the shift to bundled networks from a la carte pricing improve economic efficiency?

2. (Advanced) Consider two people. Person 1 values ESPN at $12 per month and Bravo at $5 per month. Person 2 values ESPN at $5 per month and Bravo at $12 per month. Suppose the total cost offering each network is zero. What is the profit-maximizing (i.e., revenue-maximizing) price of the bundled networks? What are the profit-maximizing prices of the a la carte networks? Does the cable company prefer to bundle the networks?

3. (Introductory) "All these things are so much more expensive when you separate them out," said David Bank, an analyst at RBC Capital Markets. "You are going to have to pay more for less choice." Does this statement imply that everyone would be made worse off by the shift from bundled network pricing to a la carte pricing? Is it the case that everyone would be made worse off?

Reviewed By: James Dearden, Lehigh University

Price discrimination on the Web

This article in the WSJ reports that e-commerce companies charge different sums for the same goods, or push some people toward higher-priced offers and do not tell the consumers.

Labels: Price discimination

TOPICS: Price Discrimination

SUMMARY: A new study of top e-commerce sites found the practice of personalizing prices for the same goods, or pushing some people toward higher-priced offers, is more widespread than previously understood. Related article: The prime time to find airfares has changed. Scott McCartney looks at when to make a purchase and how early the lowest prices pop up.

CLASSROOM APPLICATION: Students can evaluate a third-degree (i.e., multimarket) price discrimination example in which online retailers according to whether students are logging in using Apple's iOS mobile operating system. They can also evaluate a second-degree price discrimination example in which airlines price according to the day of the week in which consumers book flights.

QUESTIONS: 
1. (Introductory) Define third-degree price discrimination. Cite an example from articles of this type of price discrimination.

2. (Advanced) Define second-degree price discrimination. Cite an example from the articles of this type of price discrimination.

3. (Advanced) Why do sellers price discriminate? Include a discussion of price elasticity of demand in the answer.

Reviewed By: James Dearden, Lehigh University

RELATED ARTICLES: 
The Best Day to Buy Airline Tickets
by Scott McCartney

Price of carbon

This article from the World Bank reports that at least 1/2 of the world's countries have either put a price on carbon or put plans in place to put a price on carbon.

Oil prices fall

This article in the WSJ reports that oil prices are falling. It is a great example of the effect of surpluses on market prices.

Supply and Demand in Action in the Fracking Industry

This article in the WSJ reports that the decline in oil prices is affecting fracking and green industries. Here are some questions:

1. How does the reduction in oil prices affect the quantity supplied of oil and gas?
2. How doe the reduction in oil prices affect the market for alternative energy?

SUMMARY: Tumbling oil prices are starting to frighten energy companies around the globe, especially drillers in North America, where crude is expensive to pump. First related article: Oil prices posted their biggest one-day drop in nearly two years amid a glut of crude, threatening the stability of some countries and providing an economic lifeline to others. Second related article: Exxon and Shell are emitting more carbon dioxide despite tapping less oil and natural gas, reflecting the difficulty of tapping new energy sources. Third related article: Since the 1970s, Western politicians keep betting on $10 gasoline that never comes.
CLASSROOM APPLICATION: Students can begin by examining the causes of falling oil prices and then investigate the effects of lower prices on drilling decisions and on the willingness of consumers to switch to greener products. They can also study the effect of various types of drilling on carbon dioxide emissions.
QUESTIONS: 
1. (Introductory) What factors are causing oil prices to fall?

2. (Advanced) What is the effect of lower oil prices on the profits of extracting shale oil?

3. (Introductory) What is causing the rise in carbon dioxide emissions by Exxon Mobil and Royal Dutch Shell?

4. (Advanced) What is the effect of lower gasoline prices on the willingness of consumers to purchase hybrid automobiles? Assume that an equivalent hybrid automobile has a higher price but is more fuel efficient. Draw a graph with the total cost of driving (including the purchase price of an automobile and gasoline expenses) and total number of miles driven. Calculate the effect of a decrease in gasoline prices on the break-even point.

Reviewed By: James Dearden, Lehigh University

Maintaining a cartel is difficult

This article in the WSJ reports that OPEC members' discord adds to slide in oil prices. .

SUMMARY: Discord at OPEC is turning into a price war, loosening the cartel's grip on oil markets and exacerbating a recent steep selloff. The U.S. oil shale boom, the slowing economic growth in Asia, and political problems in the Middle East are affecting the incentives of OPEC members to set prices unilaterally.
CLASSROOM APPLICATION: Students can discuss the effect of reduced demand for oil, increased supply by competitors, and strained relations among cartel members on cartel stability. In the context of a repeated Cournot mode, Advanced students can examine cartel agreements and the incentives of members to abide by agreements.
QUESTIONS: 
1. (Introductory) What factors have led to Saudi Arabia's decision to lower the price of its oil?

2. (Advanced) The article notes a price war among OPEC member countries. But, this is not a price war in the usual sense of firms competing aggressively on price. Rather this price war refers to cartel members unilaterally setting prices below the cartel's agreed price. Demonstrate that cartel members have an incentive to cheat on cartel agreements.

3. (Advanced) Research question. Why has Saudi Arabia historically been the most powerful of OPEC members?

Reviewed By: James Dearden, Lehigh University

Minimum wage, maximum vote

This opinion in the WSJ argues that increases in the minimum wage may be good politics but is bad economics.

Los Angeles may double the minimum wage

The article in the WSJ reports on a drive to increase L.A.'s minimum wage.

SUMMARY: A drive to raise L.A.'s minimum wage to nearly twice the federal level would turn the city into a prime test for whether high pay requirements help lift workers out of poverty or increase joblessness and blunt growth. Related article: A mandated 40% increase in labor costs will put people out of work. But, hey, anything to help get out the vote.
CLASSROOM APPLICATION: Students can use wage and marginal revenue product of labor to examine the effect of an increase in a minimum wage on firm-specific employment decisions and labor market supply and demand to examine the effect of a minimum wage on employment levels in a labor market.
QUESTIONS: 
1. (Introductory) What is the effect of an increase in a minimum wage on employment levels in the fast-food industry?

2. (Advanced) The related opinion piece states, "The other 24 employees are responsible for the remaining 75%, which comes to about $3,125 an employee. That is a generous estimate, as entry-level employees likely contribute less than their more experienced colleagues. If minimum-wage crew members working 25 hours a week received a 40% raise, they would earn an additional $3,705 a year. That is $580 more than what the employee contributes to the restaurant's profits." What important point is missing from this analysis? Hint: What is the effect of an increase in the wages paid by all competitors in a market on the equilibrium price of the market's product? Does this analysis imply that all fast-food outlets will lay off all employees, with the exception of the general manager? The opinion piece does continue with the following: "But here's what middle-class business owners, who live in the real world, will do when faced with a 40% increase in labor costs. They will cut jobs and rely more on technology.... The only other option is to raise prices."

3. (Advanced) Do customers of fast-food restaurants effectively pay for an increase in a minimum wage? If so, would the burden of a minimum wage increase fall primarily on lower-income households?

Reviewed By: James Dearden, Lehigh University

Can you trust your doctor?

This story from CBS reports that a surgeon with a financial interest in a medical device company often recommends high-risk surgery that use a device sold by the company.

In a later story,

The Justice Department sued a neurosurgeon and the operators of a network of doctor-owned implant distributorships, alleging they defrauded Medicare of millions of dollars with unnecessary spinal surgeries.

The neurosurgeon, Dr. Aria Sabit, and the distributorship network, Reliance Medical Systems LLC, were the subject of a 2013 Page One article in The Wall Street Journal detailing that Dr. Sabit profited from implants he used in dozens of surgeries at a California hospital, some with tragic outcomes.

Dr. Sabit declined to comment for that article, and his lawyer didn't respond to inquiries Tuesday on the government suit. Patric Hooper, an attorney representing Reliance and its founders, said his clients "did absolutely nothing wrong" and added: "We are going to defend this thing aggressively."

The government built the civil case using cooperating witnesses wearing wires. . . . 

You can find the rest of the story Here.

Unbundling Phones and Service

This article from the WSJ reports that cellular providers are reducing the subsidies for phones while reducing monthly charges.

SUMMARY: Apple faces a risky new environment this week as it unveils new iPhones, with carriers weaning consumers off subsidies for new devices.

CLASSROOM APPLICATION: Students can evaluate whether consumers evaluate new smartphone purchases based on only the total price over the lifetime of a phone of the wireless service plus the phone, or whether they respond also to the structure of the payments : the upfront cost and monthly payments. The analysis involves the marginal price of a smartphone, the discounting future payments and the possibility of behavioral explanations involved in the consumer evaluation of the pricing plans.

QUESTIONS: 
1. (Introductory) Compare the marginal price of a new smartphone under unsubsidized and contract-based plans. How does the marginal price of a smartphone affect the purchase decision?

2. (Advanced) A consumer can pay for a new smartphone upfront or can pay for it in installments. How does the consumer's discount rate affect this decision about paying for the phone?

3. (Advanced) Do subsidies of new phone purchases combined with greater monthly payments for service plans disguise the true price of the phone to consumers? Are consumers affected by this disguise?

4. (Advanced) How would the movement to unsubsidized wireless service plans affect the prices of the best smartphones?

Reviewed By: James Dearden, Lehigh University

Supply and Demand in the Exurbs

This article from REALTORMag reports that housing prices in the exurbs are increasing.

SUMMARY: The exurbs are starting to make a comeback, signaling that the housing market's recovery is slowly spreading beyond major cities and their suburbs.

CLASSROOM APPLICATION: Students can evaluate two points in particular about the housing recovery spreading to the exurbs. First, higher gasoline prices raise cost relative to living in cities and suburbs of living in the exurbs. Therefore, higher gasoline prices cause a decrease in the relative price of exurban housing. Second, those who live in the exurbs were more likely to default on mortgages than those who live closer to cities.

QUESTIONS: 
1. (Introductory) What is the effect of increases in gasoline prices on the price of real estate in the exurbs to the price of real estate in cities and suburbs?

2. (Advanced) Research question. Why are exurban homeowners more likely than suburban homeowners to default on mortgages?

3. (Advanced) Research question. Why has the housing recovery spread from the cities and suburbs to the exurbs as opposed to spreading in the other direction?

Reviewed By: James Dearden, Lehigh University

HP to Split

This article in the WSJ reports that Hewlett-Packard is going to split its personal-computer and printer businesses from its corporate hardware and services ops. It hopes to become more agile.

Ebay and PayPal to Split

This article from the WSJ reports the Ebay plans to spin off PayPal.

Hospital mergers

This opinion in the WSJ argues that mergers between hospitals create value. 

Summary from James Dearden: "Stand-alone hospitals have too few patients to thrive in the new era of population health management. The opinion piece addresses the three rationales for horizontal mergers: economies of scale or scope, improvements in the quality of service, and increased market power."

Scotland’s ‘No’ Vote: A Loss for Pollsters and a Win for Betting Markets - NYTimes.com

This article from the NYT reports that prediction markets out-performed pollsters in Scotland's vote for independence.

Robert Griffin III and the Sunk Cost Fallacy

This opinion from the NYT argues that the Redskins may be falling prey to the sunk cost fallacy. 

Fwd: (2014Fall) PRIN OF ECON - MICRO: Median Earnings by Major

The bottom of this article has a nice search feature that gives you the # of majors, median, 75th and 25th percentile earnings, and the % working in jobs, broken into three categories that I don't fully understand. The medians for Economics and Business Economics are $47,000 and $46,000 respectively.  Here are some other medians: Petroleum Eng. - $110,000, Finance - $47,000, Accounting - $45,000, Computer and Information Systems - $45,000, Psychology - $41,000, General Business - $40,000, Business Mgmt. and Admin. - $38,000, Marketing and Marketing Research - $38,000, Political Science and Government - $38,000, History - $34,000, and Social Work - $30,000.

" These figures don't necessarily mean that switching majors will bring a big financial boost. Economics majors, for example, earn $7,000 — 18 percent — more on average than "general business" majors, but economics is also generally considered a harder and more prestigious major, and therefore tends to draw more top students; it's unlikely all those business majors could have gotten themselves a $7,000 raise just by switching to econ. Similarly, majoring in astrophysics won't net a $62,000 salary for someone who flunks Calculus 101. And of course, if a huge surge of students really did decide to follow the dollar signs into petroleum engineering, the glut of supply would likely drive down wages."

Mixed strategies

Mixed strategies are hard to implement: http://www.bbc.com/future/story/20140905-how-to-win-at-almost-everything.

Law Students Respond Predictably to Lower Tuition

This article in the WSJ describes the effects of lower tuition charged by some law schools. Guess what - education in law obeys the law of demand.

Online Learning @ Stanford

This opinion in the WSJ describes John Taylor's experience teaching an online course at Stanford. 

One effect of rent control

This article from Priceonomics estimates that landlords in San Francisco would break even if they paid tenants $130,000 to move out of their apartments. How? The landlord  of a rent-controlled apartment can sell it as a condo or raise the rent to the market price only if the current tenant moves out.

Google is Laying Fiber

The article in the WSJ reports that Google is laying high-speed fiber-optic cable in neighborhoods.

SUMMARY: Google's effort to provide faster Internet speeds at lower cost is changing how next-generation broadband is rolled out-while stirring debate about the "digital divide." "Frustrated by the hammerlock of U.S. broadband providers, Google Inc. has searched for ways around them to provide faster Internet speeds at lower cost, via everything from high-speed fiber to satellites.... Telecom and cable companies generally have been required to blanket entire cities, offering connections to every home. By contrast, Google is building high-speed services as it finds demand, laying new fiber neighborhood by neighborhood. Others including AT&T Inc. and CenturyLink Inc. are copying Google's approach, underscoring a deeper shift in U.S. telecommunications policy, from requiring universal service to letting the marketplace decide."

CLASSROOM APPLICATION: Students can examine the conditions under which a universal coverage, combined with exclusive franchise (i.e., monopoly) requirement improves economic welfare and the conditions under which it decreases welfare. The answer depends on whether the regulation discourages entry into the broadband market and on the price of service.

QUESTIONS: 
1. Why has Google entered the U.S. broadband industry?

2. Why is Google pursuing a strategy of laying high-speed fiber neighborhood by neighborhood as opposed to blanketing entire cities or towns? Comment on the fairness of the neighborhood-by-neighborhood strategy.

3. Why is the regulatory policy of cable provision shifting away from the policy of requiring entire cities to be blanketed?

Reviewed By: James Dearden, Lehigh University

Occupational Licensing

This opinion in the WSJ argues that one barrier to upward mobility is overly restrictive occupational licensing requirements imposed by state and local governments. The writer thinks that governments should eliminate requirements when its cost to benefit ratio is greater than one.  

SUMMARY: Cost-benefit analysis and 'lookbacks' could lift the unnecessary burdens of occupational licensing. "A widely overlooked part of Paul Ryan's antipoverty plan draws attention to the problem of occupational licensing, and it rightly calls on states and local governments "to begin to dismantle these barriers to upward mobility." But how? The answer, we think, lies in the adoption of a rigorous cost-benefit test. That test would impose new discipline on what state and local governments do-and it would eliminate unjustified barriers to job creation and economic growth."

CLASSROOM APPLICATION: Students can examine the effect of state and local regulations on entry, competition, prices, and economic efficiency of industries. Students can examine occupational licensing for example.

QUESTIONS: 
1. What are "regulatory lookbacks"?

2.When considering whether to implement new regulations, is it important for legislators and regulators to examine the economic consequences of doing so? What are the relevant economic consequences? Why is cost-benefit analysis an appropriate methodology for evaluating government regulations?

3. Who suffers the most from occupational licensing requirements?

Reviewed By: James Dearden, Lehigh University

4. Who benefits the most from occupational licensing requirements?

Google Shifting Focus

This article from the WSJ reports that Google is shifting its focus from driving visitors away as quickly as possible to providing visitors with more information. Here is the video story. 

"A central issue in evaluating Google's search output is whether people prefer Google's new detailed search output featuring information the company has generated or whether they prefer search output that does not highlight this information. 'If Google is perceived as favoring its own content over impartial search results, it would risk losing users over time. But if users find the results more helpful, they'll keep coming to Google, forcing advertisers to stay there.' The article also notes complaints by Google's advertisers and antitrust issues that may be involved in Google's new search output. 'Google may alienate advertisers such as online-travel agencies that alone pay it billions a year. Those companies fear that Google's changes will reduce the number of bookings for which they can claim commissions. The shift has spawned antitrust investigations world-wide as some online publishers complain Google wields its extensive influence over what Internet users see to promote its own content and services, in the process helping some businesses while hurting others. A U.S. Federal Trade Commission probe was closed in Google's favor more than a year ago'" (James Dearden, Lehigh University).

Creativity

The BBC's advice on sparking creativity.

Earned Income Credit v. Minimum Wage

This opinion in the WSJ argues that expanding the earned income credit to childless workers would be a more effective way to reduce poverty than increasing the minimum wage.

Here are some good questions.

1. Describe the earned income tax credit. What are the advantages of the earned income tax credit of the minimum wage in raising incomes of the working poor?
2. What is the effect on the incentive to work of the earned income tax credit compared to payments for not working?
3. The opinion piece's author is research director of the Employment Policies Institute, which receives support from restaurants, foundations, and individuals. Would restaurants favor increases in the earned income tax credit? Why would restaurants oppose increases in the minimum wage?

4.  Who "loses" if the earned income tax credit expands? Who "wins"?

5.  Who "loses" if the minimum wage increases? Who "wins"?

Tmall, Gray Markets, and Counterfeit Goods

This article in the WSJ reports that Alibata, the firm that runs Tmall, a huge online sales site in China, is telling retailers that it will remove firms selling its products on Tmall, if the retailer agrees to open a store on Tmall. "Before Burberry opened its Tmall store, more than 50 vendors—none of them authorized by Burberry—sold the brand's products on the site." The retailers don't want to be on the same site as firms selling their products in the gray market and Tmall has agreed to remove the offending firms. 

Here are some good questions:
1. What is the distinction between counterfeit and gray-market goods?
2. What is the effect of gray-market sales on the profits of a brand?

3. Why is China's Alibaba willing to remove gray-market goods from its site?

Drug shortages?

This article in Reader's Digest reports that shortages for many drugs exist and that the number of shortages may grow.

This is an excellent introduction to how prices move in markets. What do economics textbooks say happens to the market price when shortages exist? Why doesn't this happen in the markets described by the article?

It is also an excellent introduction to a discussion of the role of "money" in a market system. The articles says the first reason for the shortages is "all about money". The implication is, I believe, that a quest for profit creates the shortages. Does a quest for profit create shortages in markets where price may move freely? If not, does the quest for profit reward "good" behaviors or "bad" behaviors?

Risk, Preferences, and Rationality

This article from the WSJ reports on perceptions of risk. It illustrates that whether an action warrants its risk depends upon preferences and raises questions about what we mean when we say that taking the action is rational.

Supply and Demand in Action in the Milk Markets

The article in the WSJ reports the effects of the shift in domestic demand away from animal milk to plant milk and surging demand for animal milk overseas. Supply and demand predicts accurately the effects: the price of raw animal milk increased, sales and profits on animal milk products has decreased, and sales and profits of plant milk products increased. The article also reports that decreases in the price of raw animal milk in the 2009 led dairy farmers to exit the industry and that a drought contributed to the reduction in supply of raw milk. It reports that the supply of raw milk "is expected to increase this year, easing costs for Dean."

Supply and Demand in Action in the Diamond Market

This article from the WSJ, http://online.wsj.com/articles/diamonds-regain-their-sparkle-for-miners-on-rising-demand-and-prices-1404826159, is a good example of supply and demand in action in the diamond market.

Game Theory Secrets for Parents

This article from the WSJ, http://online.wsj.com/articles/game-theory-secrets-for-parents-1405005848, is an intriguing introduction to game theory.

Political Philosophy

John Stuart Mill and the Minimum Wage

My reading of John Stuart Mill is that he would oppose any attempt by the government to impose or raise the minimum wage. In On Liberty he wrote:

… the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. … the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, to do so would be wise, or even right. These are good reasons for remonstrating with him, or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil in case he do otherwise. … The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.

I suspect that he would see no harm to anyone when an employee voluntarily agrees to work for an employee at a wage to which both agree. I suspect that he would argue that each of the two parties would agree to the contract only if each expects to gain. I also suspect that he would argue that the agreement imposes no direct or obvious cost to anyone else.

One goal in when I teach principles of economics is to have students on their political philosophy. Political philosophy examines fundamental questions about why governments exists, its proper role, and what warrants government intervention into the lives of its citizens.

Here are some possible perspectives based on my reading and definition of terms. Please comment if you have suggestions for improvement.

1. Anarchy. Any government is immoral.
2. Classical liberalism. The goal of government is to maximize the individual liberties of its citizens. To do so, it provides citizens with laws and courts to protect them from theft, coercion defends them from invasion, and supports rules of law that define and protect property rights and contracts. I think that they generally agree that the government should also provide public goods when markets fail to do so and intervene when market transactions impose external costs or benefits on others.
3. Utilitarianism. The goal of the government is to maximize the total welfare of its citizens. Government should act if the sum of the benefits to it citizens exceeds exceeds the sum of its costs, even if some citizens suffer a net loss.
4. Pareto optimality.   The government should act only if every citizen benefits. This position is not practical in most situations. A more practical refinement is that the government should act only if the vast majority of its citizens benefit and the loss suffered by the minority is small and as small as possible. The refinement recognizes that transactions costs of both reaching unanimity and identifying benefits and losses are high. It allows for government to act when everyone knows that some people will suffer some harm but cannot identify easily who or exactly how much.

Which of these positions best reflects your political philosophy? Feel free to add a comment with your preference. Combinations are new positions are welcome.

Education is a scarce good

I think that learning is a noble pursuit, that I am privileged to help students learn, and that students are privileged to have the opportunity to learn. Here is some advice to help students make the most of their opportunity. Remember: people generally get out of an activity what they put into it.

You will learn more as you devote more time and effort to this class. Since education is not a free good, the cost of learning is not zero. The cost comes in many forms, some explicit and some implicit. The explicit costs include the tuition you pay and any subsidy that the government gives to the University. The implicit costs are the time and effort that you, the student, must devote to your classes. The rule of thumb is to spend three hours studying outside of class for every hour spent inside class. Completing an economics class successfully is unlikely without spending a considerable amount of your time and effort. If you limit your effort to only the time spent in the classroom, you will not learn much and the experience might be miserable.

“Read, read, read; write, write, write; think, think, think” is how a group of teachers summarized the goals of education. I believe that you will learn much and enjoy the class if you read, write, and think about the material on a regular and ongoing basis. This article from the NYT argues that your study time is more effective if you break it into several small sessions.

Preparing before class is crucial. I attempt to fill the time we have together with problems, exercises, discussion and debate; students without proper preparation will not be ready to learn because they will not be ready to participate meaningfully. Complete readings and assignments when they are due, not after.

Use the time we have together wisely. 

1. Bring questions to class about material we covered earlier that you don’t understand. 
2. Be ready to start on time, clickers, paper, notes, and pen or pencil out and ready to use. 
3. Take good notes: summarize the main points and outline the discussion. Writing down what you are seeing, hearing and thinking helps you remember.
4. Pay attention and avoid distractions. Contrary to some popular conceptions, your brain works better when it focuses on one activity at a time. Browsing the Internet and social media are distractions to your brain and the brains of the students seated near you. Contact the instructor if another student’s use of the computer distracts you.

Review and organize your notes the day you take them. Studies show that if you review and organize your notes within 24 hours of taking them you will retain 80% of the information for 8 weeks. A student who heard this remarked, "That's long enough."

Identify and learn the general principles used in the course as you study. Economics is more about the forest than it is about the trees. Learning why you followed a particular approach to solve a problem is usually more important than learning how to solve the problem; the problem is usually an example of a more general principle. The goal is to have you apply the principles and concepts to draw your own conclusions and to support them. “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions” (John Maynard Keynes).

Does Amazon understand the Nash Bargaining equilibrium

This article from the WSJ reports that Amazon has offered to let Hatchette's authors keep 100% of the revenues for books sold on Amazon while Amazon and Hatchette negotiate a contract: . Amazon wants a larger share of the revenue and lower book prices.

Does the offer improve Amazon's bargaining position?

Who enrolled in Obamacare?

This article in the WSJ reports who enrolled in Obamacare during the initial registration period and who did not: http://online.wsj.com/articles/sign-ups-not-the-only-way-to-gauge-health-laws-success-1404413482. 

Are the trends consistent with the rational actor paradigm?

Do they illustrate the problems asymmetric information cause when selling insurance?

WalMart, Strategy, Dynamic Pricing, and eBusiness

This article in the WSJ is a great introduction to both strategy and dynamic pricing: http://online.wsj.com/articles/wal-mart-looks-to-grow-by-embracing-smaller-stores-1404787817. 

Why has the price gap dwindled?

What is dynamic pricing?

What role does IT play in dynamic pricing?

Is dynamic pricing easier to implement in an eStore or one made with bricks and mortar?

Supply and demand in action in the brewing industry

This article from the WSJ is a great example of supply and demand in action.

• It shows that the price of hops increases as the demand for them increase.
• It shows that the increase in the price of hops reduces the supply of hoppy beers and increases the supply of session beers.

Put on your fortune teller hat: What do you predict will happen to the number of acres of land farmers use for hops? What do you predict will happen to the price of hops in a few years?

Is college worth the cost?

This report says that the answer is a qualified yes, with a 2-year degree being a better bet than a 4-year degree for many people, and majors that stress analytical and quantitative skill (cough, economics) being better bets than majors that do not: 

Entry and profits in the "gaming" industry

This article from the WSJ is a good example of the effect of entry on the profits earned by incumbent firms.

Internet Providers and Switching Costs

This story from Planet Money discusses why customers in the US have less options from which to choose for Internet than consumers in other countries.

Mixed economies

This story from Planet Money is a good example of government intervention in markets. It reports the difficulty automobile manufacturers have in making a car that satisfies government regulations across countries.

Do entrepreneurs deliver humanitarian aid efficiently?

This story from planet money explores the question. It is a nice launching point for a discussion of the proper roles of government and markets.

Is a carbon tax the fix for global warming?

This story from planet money says yes.

A cure for moral hazard?

This story from Planet Money describes new punishments for banks that do bad things Some options mentioned are forbidding the bank from using the dollar or engaging in activities in the US, requiring that the bank firm "bad" people, and prison time for the "bad" people.

Who owns the air?

This clip from Planet Money is a good introduction to property rights.

Is Net Neutrality Efficient?

This article from the WSJ is an opinion that Internet service would improve if customers paid according to how much and when they use the service. It is a good introduction to subsidies, price discrimination, and congestion pricing.

A Proposal for Student Loans

This article from the WSJ reports a proposal to make repayment of student loans a percentage of the student's income after graduation. The percentage and number of years during which payment occurs would vary depending upon the school, major, and perhaps characteristics of the student.

The article is a good introduction to signaling. Students might learn more about the earning potential of various majors when they see that one major requires 10% of their salary for 5 years while another major requires 20% for 15 years.

The article is also a good introduction to adverse selection and moral hazard. Who is more likely to choose this plan over a traditional fixed-repayment loan, someone who plans to work hard to earn high income or someone who prefers to enjoy life and wants to work enough to "get by". How does the requirement to pay a percentage of income to the lender affect the incentive to work?

The Effects of the Increase in the Demand for Protein

This article in the WSJ is a good example of supply and demand in action. It shows how the increase in the demand for protein is affecting the market for beef, pork, soybeans, and corn. An interesting question is whether prices are rising despite the increase in production, as stated in the subtitle, or if production is rising because price are rising. 

Tyson wins an auction

This article from the WSJ is a great example of auctions and, possibly, the winner's curse.

Supply and Demand in Action

This article reports that ticket prices for the US Open have fallen because Tiger Woods is not playing.

Pricing Restaurant Reservations

This article from the WSJ is a good example price discrimination, peak-load pricing, and the effects of information asymmetries and who bears risk.

Seattle Raises Minimum Wage

This article reports that Seattle raised the minimum wage there to $15 / hour. Who gains and who loses?

EPA Prepares to Release the Rules Power Companies Must Follow to Meet Goals to Reduce Carbon Emissions

The article from the WSJ is a good summary of the issues. 

Why has the price of cordovan shoes increased?

Who would have suspected that a reduction in the demand for horse meat would make men pay more for fine shoes? This article from the WSJ reports that the price of shoes made from cordovan leather has increased and describes some of the reasons why. It is a great example of supply and demand in action. 

The article describes two events that are affecting the market for cordovan shoes. First, a reduction the supply of cordovan leather. Second, an increase in demand for haute-crafted men's shoes. Do the events have the same impact on the price of cordovan shoes? The quantity?

Electricity Prices Going Up?

This article from the Richmond-Times Dispatch reports that 

"Electricity prices are probably on their way up across much of the U.S. as coal-fired plants, the dominant source of cheap power, shut down in response to environmental regulations and economic forces.

"New and tighter pollution rules and tough competition from cleaner sources such as natural gas, wind and solar will lead to the closings of dozens of coal-burning plants across 20 states over the next three years. And many of those that stay open will need expensive retrofits."

Here are some good questions about the application of supply and demand analysis.

1. Would tougher pollution rules lead to closings of coal-burning plants?
2. Would tougher pollution rules lead to higher prices for electricity?
3. Would greater availability of natural gas lead to the closings of coal-burning plants?
4. Would greater availability of natural gas lead to higher prices for electricity?

Leverage?

This article from the LA Times describes the offer AT&T made for DirectTV. An escape clause cancels the offer if DirectTV is unable to renew its contract with the NFL. How would this affect the outcome of the contract between DirectTV and the NFL in the Nash Bargaining Solution?

Screening and game theory

This article in the WSJ, written by Levitt and Duubner of Freakanomics fame,  is a great discourse on screening. Perforn an internet search on the title if the article does not load properly.

J. Crew tries versioning

This article from the WSJ is a good example of a firm attempting to use versioning to segment buyers. Should J. Crew raise prices in original stores after it opens the budget version?

Search the internet of the title if the article fails to load properly.

Labor shortages, wages, and housing prices

This article in the WSJ is a great example of supply and demand in action. Growing demand for construction workers has created a shortage of workers. In turn the wages increase, the supply of housing decreases, the prices of houses increase, and the quantity traded falls.

Search the internet for the title of the article if if fails to load properly.

This article in the WSJ is a great example of supply and demand. It reports that increases in demand for cotton and decreases in its supply have driven up the price of cotton. The supply of cotton fell as farmers responded to higher relative prices for substitute crops. Now, in response to the higher cotton prices, the quantity traded of manmade fibers is increasing.

Netflix wants to discriminate in price

The article from the WSJ reports that Netflix is planning to increase price for new users and only new users. Is the difference in price consistent with 3rd-degree price discrimination?

The article is also a good introduction to vertical relations, antitrust, and net neutrality.

SUMMARY: Netflix said it plans to increase its U.S. prices for new members by a dollar or two. The company also came out in opposition to Comcast's proposed acquisition of Time Warner Cable. With regard to relationship between Netflix and cable providers, the company has a lot of choices about how it sends content to customers, but at some point, its content must realistically pass through the systems of cable providers. Netflix chief executive told analysts that Netflix had "no choice" when it recently agreed to start paying Comcast to interconnect Netflix servers directly to Comcast's cable systems as a way of ensuring good quality video streaming. Netflix has argued operators should strike such interconnection deals without levying fees. Netflix also came out in opposition to Comcast Corp.'s proposed $45 billion acquisition of Time Warner Cable warning that the combined company would have "anticompetitive leverage" because its systems would pass 60% of homes that take broadband Internet-access.

CLASSROOM APPLICATION: Students can analyze whether Netflix should increase its prices. Some analysts have argued that Netflix can charge more for its service because the company has the opportunity to close a gap in how much its customers spend for content compared with traditional competitors. Instructors can also present the issue of whether Comcast can use its market power in cable service provision to increase prices on content providers like Netflix. One interesting issue is about the effect of a Comcast-Timer Warner Cable merger on the market power of the merged company when dealing with content providers.

QUESTIONS: 
1. (Advanced) Why is Netflix increasing the price it charges new customers? Why only new customers?

2. (Advanced) Why would Netflix be harmed by a Comcast-Time Warner Cable merger? Keep in mind that Comcast and Time Warner do not compete for customers in any geographic areas.

3. (Introductory) Why do most Netflix subscribers connect to the service using cable connections and not cellular wireless connections?

Is Google good?

This article reports criticism of Google from a media tycoon in Europe. He worries that Google has too much power in the market, that he "had little choice but to engage with Google as 'we know no search engine alternative to increase our online reach'".

Questions to consider?

1. Is Google a monopoly? If so, how did it acquire its position?
2. Does Google have monopoly power? If so, how did it acquire the power?
3. Should the US charge Google with antitrust violations? If so, what remedies should the government seek?

As Wage Debate Rages, Some Have Made the Shift

This article in the WSJ reports the effects of local minimum wage laws that set the minimum above the national rate. The effects vary, some good - higher moral and better customer service - and some bad - closing stores, fewer hours, higher prices, from location and business type.

SUMMARY: In cities where local wages exceed the national minimum, the consequences are big and small, cutting across everything from the number of hours assigned to employees, to menu prices to food ingredients. The article cites a paper in Review of Economics and Statistics: "The reaction among San Jose employers [to an increase in the city's minimum wage] was largely in line with a study of 288 areas where the minimum wage differed across county borders. The research, published in the Review of Economics and Statistics in 2010, found municipalities with higher pay didn't suffer job losses among low-wage restaurant workers. Nearly half of all minimum wage-earners work in food service."

CLASSROOM APPLICATION: Students can examine the effect of an increased minimum wage on firm decisions. "The real-world impacts [of an increased minimum wage] can vary: Some companies had no difficulties passing along labor-cost increases while other businesses said they might close marginal stores to pare losses.... For businesses in San Jose, the results aren't entirely negative. Low-wage employers in the city have raised prices and trimmed costs, but some also report improved employee morale and better customer service."

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the minimum wage on the supply of fast food? What is the effect of the change in supply on the price of fast food?

2. (Advanced) Suppose an increase in the minimum wage results in a $0.25 increase in the marginal cost of making a hamburger. How does the increase in the equilibrium price of hamburgers due to the increase in the minimum wage depend on the price elasticities of supply and demand?

3. (Advanced) Why are some fast food establishments increasing prices in response to increases in the minimum wage while others are cutting back on the number of employees? Why could each of these two responses possibly be profit-maximizing?

4. (Advanced) Is it possible that an increase in the minimum wage does not result in layoffs? Does the article offer good evidence that an increase in the minimum wage does not result the decreased demand for labor?

Americans Lose Their Taste for Cereal, Soda and Soap

This article in the WSJ reports that the use of price discounts has increased and describes possible reasons why. (Conduct a Google search on the title if the article does not load properly.) It is a good introduction to supply and demand. The discussion of price wars might be a good introduction to game theory. Finally, the report that increases in the prices of energy and education are driving down the prices of consumers goods might be a good introduction to monetary policy and inflation, particularly the view that higher oil prices result in inflation only if the Fed monetizes them.

SUMMARY: Makers of consumer staples are resorting to aggressive discounts to overcome an unexpectedly persistent problem: Their industry is barely growing. The article offers a reason for the lack of growth. "Many segments are affected by changing preferences, habits and spending priorities.... The problem for makers of household basics is that consumers are devoting a shrinking share of their wallets to packaged goods as other costs of living rise more sharply, such as health care and education." The article also suggests that product discounting is the result of the stagnant or decreasing demand. "Discounts are in the standard tool kit for consumer-products makers. Still, the current level of activity is particularly high. All told, some 33.7% of consumer packaged goods-from soda and razors to shampoo, shaving cream and paper towels-were sold on promotion in the 12 months through February 2014, according to data from Nielsen." Commenting on the possibility of price wars, "They are the easiest things to start, and the hardest to finish."

CLASSROOM APPLICATION: Students can evaluate the cause of the decreases in demands for consumer products, which presumably is a change in preferences, and the result of the shifts in demands. The short-term consequence is lower prices. Instructors can also ask students to conjecture about long-term price changes.

QUESTIONS: 
1. (Introductory) What factors have caused the decreases in the demands for consumer staples? Discuss preferences, technological change, and the prices of related products.

2. (Advanced) Why are manufacturers and retailers wary of offering frequent discounts on products? What factors in the markets for consumer staples are causing frequent discounting?

3. (Advanced) What is a "price war"? Why are price wars easy to start and hard to finish? What factors in the markets for consumer staples could prompt price wars?

Transparency pricing in healthcare

This article in the WSJ reports on the advantages of increasing the transparency of prices. Conduct a Google search of the title if the full article does not appear.

SUMMARY: There's a major effort under way to make sure patients know how much they'll pay-before they make treatment decisions. "Princeton economist Uwe Reinhardt likens using the U.S. health-care system to shopping in a department store blindfolded and months later being handed a statement that says, 'Pay this amount.' The price-transparency movement aims to lift that veil of secrecy and empower patients and other payers to be smarter health-care consumers.... Experts expect consumers to be much more price-sensitive as they shoulder a growing proportion of health costs themselves."

CLASSROOM APPLICATION: Instructors can present two points about the incentives of patients to consider price when choosing health-care providers: price transparency; and consumers paying at least some of the cost of care.

QUESTIONS:

1. (Introductory) Why is better consumer information about health-care prices important in bringing down the cost of health care?

2. (Introductory) Why is more patient responsibility in paying for the price of a procedure important in bringing down the cost of health care?

3. (Advanced) How would better consumer information about the prices of various health care providers for a particular procedure combined with greater consumer responsibility for the price of the procedure affect the cost health care?

4. (Advanced) How would "reference pricing" affect the quality of care? How would it affect the compensation of health-care providers?