Friday, April 18, 2014

Black Friday and the Prisoner's Dilemma

Bloomberg BusinessWeek explains that "Black Friday", the day after Thanksgiving to start the Christmas shopping spree, is an example of the Prisoner's Dilemma.  Here's how:  collectively retailer's are more profitable by not lowering prices if all retailers do not lower prices; but individually each retailer makes higher profits by their lowering prices if their competitors do not lower prices.  Since each is better off by lowering their prices, they all lower prices but earn lower profits than by all not lowering prices.

Wednesday, April 16, 2014

Product Differentiation & Craft Beer

The New York Times has a good article on how one craft beer producer is restricting output as their business model.  Craft beer is a niche beer market that survives on product differentiation, which as you read the article linked above you will find that Hill Farmstead Brewery has in abundance.  Thus, the decision to only sell locally will reduce the ability to make more profits, but continue to keep the perceived value of the product high.  This trade off between high quality and high output is a classic component of a firm in a monopolistically competitive market.  To be profitable the firm's output has to be very different (typically produce something that customers value different from others) or the firm has to produce enough of the product to make it slim margins on the product.

Tuesday, April 15, 2014

Monday, April 14, 2014

Starbucks Pricing in China

The Wall Street Journal has a story on Starbuck and latte pricing in China.  Basically, Chinese customers feel that the price is too high.  Unfortunately, the article linked above does not have the price breakdown graphic that was in the print edition, so I will put that information here.

Other Operating Expenses = 0.23
Equipment Costs = 0.17
Tax = 0.24
General & Administrative = 0.28
Labor = 0.41
Raw Materials = 0.64
Store Operating Expenses = 0.72
Rent = 1.25
Profit = 0.85
Price = 4.80 (does not add up to 4.79 due to rounding)

So given the information above, we can see that Starbucks has market power in that they are able to charge a price above their marginal costs.  Some of the costs above are fixed (Rent, General & Administrative are two good examples) and some are variable costs (Raw Materials, Tax are two good examples).  Thus since the price is greater than marginal cost, this product is profitable to Starbucks.

Saturday, April 12, 2014

Rising Pork Prices

Pork prices have been increasing lately and the reason is supply and demand.  On the supply side there are fewer hogs being produced due to a deadly disease currently hitting hogs resulting in expectations that pork prices will be increasing and on the demand side consumers are switching from much beef (at much higher prices).

Friday, April 11, 2014

MSG Dumping

The Wall Street Journal reports that the US is investigating whether China and Indonesia "dumped" MSG into the US.  Dumping occurs when a producer sells at "artificially low prices".  One reason to do so is due to get rid of excess inventories due to domestic under-consumption, and another is that firms are receiving production subsidies that allow the producers to make a profit even at "artificially low prices".

The alternative explanation is that demand is different in the two nations and that firms are engaged in group pricing (or third degree price discrimination).  In this case, firms are maximizing profits while charging lower prices in markets where demand is more price elastic and charging higher prices in markets where demand is more price inelastic.

Likewise prices can be different if the domestic market is structured like a monopoly and the foreign market is structured more competitively - hence prices are different, but for reasons that follow economic incentives.