Friday, July 25, 2014

Cross-Subsidization

One of the topics I talk about in both my MBA Managerial Economics course and in my Industry Analysis course is cross-subsidization - which is also called a loss leader.  The idea that I focus on is the market characteristics in which selling one good/service at at loss can be profitable when it allows the firm to sell another good at a profits.  Here is an excellent example of cross-subsidization:  oysters.

Monday, July 21, 2014

Tesla and Car Dealerships

The Wall Street Journal reports that Tesla wants to sell cars directly to car buyers, but car dealers are opposed as it violates state franchise laws.  The automobile production market is very similar to a market structure in economics that is called an oligopoly.  Likewise car dealership is also less than perfectly competitive.  So, if we have some oligopoly manufacturers selling to some oligopoly retailers that behave as Cournot firms (and the automobile industry seems to be a good candidate), the economic incentive is that the manufacturer and retailer will combine forces (either merge or form a legal relationship) as it is their dominant strategy.  Problem is that if the retailer does not have some type of relationship with the manufacturer, the retailers profits will fall, which is the conclusion from the Cournot oligopoly vertical relations model presented in class.

Friday, July 18, 2014

The Economics of Plastic Bag

The Wall Street Journal has a really good article on the economics of plastic bags.  Specifically, we have an industry where an input (polyethylene) is about 70% the costs of plastic bags and that the supply of polyethylene is increasing due to increases in the supply of US natural gas production, and yet the price of polyethylene is also rising.  This could be due to differences in the price of producing natural gas from shale and fracking as opposed to traditional production - meaning that natural gas production costs are increasing as natural gas output increases.  Likewise we could have limited competition on the production of polyethylene, and this result in higher prices, or there could be different demands between the US and international markets (say due to higher competition) resulting in higher prices.  I do not have access to the data, but this does seem like a conundrum. 

Tuesday, July 8, 2014