Hawkonomics

The Changing Pearl Market

2012-02-02T07:06:00.000-06:00

The market for pearls is changing, primarily due to a change in supply. Specifically, the production of fresh water pearls has increased the pearl supply, and as predicted by the supply and demand model, pearl prices have decreased.

Supply Disruptions Affects Market Prices

2012-02-02T06:57:00.000-06:00

The earthquake and tsunami in Japan resulted in a supply disruption (think shifting the supply curve to the left) in 2011. As a result, the market price of those products (such as memory chips) started to rise, which is what the supply and demand model predicts with a shift of the supply curve to the left.

Additionally, flooding in Thailand is impacting the price and availability of external hard drives.

Decreased Demand and Price

2012-02-01T08:00:00.000-06:00

After the 2011 earthquake and tsunami, Japanese demand for oil decreased (think shift the demand curve to the left), which resulted in a decrease in the rise of oil prices.

Input Price Changes and Supply

2012-02-01T07:39:00.000-06:00

In 2011 Delta reduced the number of flights and/or seats in response to higher fuel prices. This is an excellent example of how a change in resource (or input) prices affects the supply of airline service.

Discussion on the Future of the Post Office

2012-01-31T07:19:00.000-06:00

Interesting discussion on CNBC with the Post Master on the financial difficulties of the post office, primarily because of decreased first-class letter demand due to lower priced substitutes (on-line bill paying).

Declining Solar Panel Prices

2012-01-31T06:35:00.000-06:00

The price of solar panels has been falling - as reported by the New York Times, and is mainly due to a change in supply. In reading the linked article, you will notice that their has been an increase in the number of firms producing solar panels, which we represent as a shift in the supply curve in class. Notice also that as the solar panel "supply curve" shifts to the right that the price of solar panels decreases, also as presented in class.

Cattle Prices Rising

2012-01-30T07:21:00.001-06:00

Cattle future prices were on the rise in late 2011 even with a decline in US beef consumption (demand). Why? Because US cattle supply was decreasing more than the decline in US beef demand.

Gas Prices and Car Buying

2012-01-30T07:18:00.000-06:00

One of the early topics in Prin. of Microeconomics is about consumer behavior and specifically about how the prices of other goods affect consumer behavior. If prices of other goods do impact the demand for another good, then they are either a substitute or a complement. Here is a New York Times article that has both and fits with the theory of consumer behavior quite well.

First, let's note that gasoline and automobiles are complements - you need gasoline (ignoring diesel and electric) to power your car and thus are used together, which is a complement. As gas prices increase, the demand for gas powered cars decreases. Problem is that most people do not have great alternatives to a gas powered car in the short-run, so they are substituting smaller cars (using less gasoline) for larger cars, exactly what we see in the NY Times article linked above.

CEO Interview with Hertz's Mark Frissora

2012-01-28T08:52:00.000-06:00

CNBC interview with Hertz CEO Mark Frissora. Topics include demand, pricing and obstacles to revenue growth.

Increased Demand for Elevators

2012-01-28T07:22:00.000-06:00

The Financial Times reports that the demand for lifts (elevators) is increasing.

Peach Preferences?

2012-01-27T07:21:00.001-06:00

The New York Times has an article on the rivalry between South Carolina and Georgia peach producers. South Carolina produces more peaches but Georgia producers say their peaches are better tasting. Here is a good example of the difference between producer and consumer preferences. While Georgia producers feel that their produce is better tasting than South Carolina peaches, economically it does not matter. What matters is how consumers view the two states produce. If they view them differently, economists call this product differentiation, if not then the two regions produce is homogeneous.

As stated in the article, “I honestly don’t think you can taste a difference”, which means in economic terms that from the consumers perspective that peaches are homogeneous or there is no preference for one over the other. If consumers cannot tell the difference in taste and do not respond to marketing differences by geographic region or branding, peach prices in each state will tend to converge toward each other as predicted by the competitive market model.

KFC & Japan

2012-01-27T07:19:00.000-06:00

One of the most popular items sold in Japan at "Christmas" time is Kentucky Fried Chicken - I'm not making this up. Here is another example of how changes in preferences (KFC in Japan) can be modeled using a demand curve to analyze market behavior. Note that their is an increase in the popularity of fried chicken by Japanese consumers, and as such economists would model this as the demand curve (which represents consumer behavior in a very simplified manner) shifts to the right. As you will note in the article linked at the beginning of the blog, Japanese consumers are standing in line waiting for their chicken and this is exactly what a rightward shift of the demand curve is representing. In other words, if the price remains the same, then there is an increase in quantity demanded due to the change (in this case) in Japanese consumer preferences for chicken.

Consumer Behavior and Gas Prices

2012-01-26T07:54:00.000-06:00

In economics, one of the fundamental concepts is consumer theory or consumer behavior. The basic idea is that as the price of a good (say gasoline) changes that the amount a typical consumer purchases changes in the opposite direction. This is what we refer to as the law of demand. Not only that but depending on the choices that consumers have in the marketplace, theory predicts that if there are acceptable substitutes, over time consumers will switch to lower priced goods.

Here is a great article from the New York Times that shows both of these effects. Consumers are driving less and also choosing other transportation options (public transportation).

Christmas and the Law of Demand

2012-01-25T07:19:00.000-06:00

The New York Times reports that this past Christmas (holiday) season we have seen many retailers use the law of demand to get consumers to purchase more Christmas (holiday) gifts - price.

Rational Thieves

2012-01-20T07:33:00.000-06:00

One of the foundations of Prin. of Microeconomics is the idea that people make rational decisions. Here is an example of how thieves in England are doing just that (please note I am not advocating stealing). By their choices as to what to steal, we see that they are responding to the value of the items and the ease to which to re-sell them.

Correlation Is Not Causation

2012-01-18T07:01:00.001-06:00

For what I think is a humorous look at this correlation and causation issue take a look at this series of graphs from Business Week.

Texting in Class Solution

2012-01-17T20:37:00.000-06:00

Now, why didn't I think of this?

&amp;amp;amp;amp;lt;a href='http://video.au.msn.com/?mkt=en-au&amp;amp;amp;amp;amp;vid=d33d90bf-2520-4bca-9e78-40400c931d5a&amp;amp;amp;amp;amp;from=&amp;amp;amp;amp;amp;src=v5:embed::' target='_new' title='Teacher&amp;amp;amp;amp;amp;#39;s Texting Policy' &amp;amp;amp;amp;gt;Video: Teacher&amp;amp;amp;amp;amp;#39;s Texting Policy&amp;amp;amp;amp;lt;/a&amp;amp;amp;amp;gt;

Rising Food Prices & Egyptian Revolution

2012-01-12T09:54:00.000-06:00

While not the objective of Prin. of Microeconomics, here is an interesting video on how rising food prices were a major factor in the recent Egyptian revolt. We will discuss a number of the issues in this video as the course progresses (either directly or indirectly), so if you have a few minutes, take a look.

Watch The Role of Rising Food Prices in Egypt's Revolution on PBS. See more from PBS NewsHour.

Ford Motor Company

2012-01-05T21:51:00.000-06:00

Here is a very nice piece on the turnaround of the Ford Motor Company.

Hulu's Future

2012-01-03T06:38:00.001-06:00

Hulu is in a unique situation. Hulu has a technological innovation in offering television programming and more importantly has an advantage in that they are able to provide a valuable service to their customers. Hulu has a significant problem in that the content producers are not excited about the Hulu television content model.

NCAA schools outsource ticket sales

2012-01-02T08:36:00.000-06:00

USA Today article on how some colleges are outsourcing ticket sales (among other services) to increase revenues.

Cincinnati Bengals Buy One Get One Free Ticket Promotion

2011-12-28T09:31:00.000-06:00

The Cincinnati Bengals are offering a buy one get one free ticket promotion in the attempt to increase stadium attendance. Notice that in order to increase attendance (quantity) the team is lowering the average price of two tickets to the price of one ticket, which is economically referred to as the Law of Demand.

Fed Probe of NCAA Licensing Arrangements

2011-12-27T08:20:00.000-06:00

The USA Today reports that the Department of Justice is inquiring about how college licensing deals are made and if this is anti-competitive.

Dave Berri and Paying College Athletes

2011-12-26T08:32:00.000-06:00

Check out Dave's take on paying NCAA athletes.

MLBPA accused MLB of Collusion

2011-12-22T12:11:00.000-06:00

Major League Baseball is no stranger to being accused of collusion, and in 2008, the Major League Baseball Players Association accused MLB of collusion in the case of Barry Bonds. While the details are not public (to my knowledge), and thus the validity of the accusations are unknown, this is an example that sports teams do have some incentive to collude.

Is the (European) Football Transfer Market Irrational?

2011-12-21T09:28:00.000-06:00

The Financial Times has an interesting article questioning the rationality of the European football transfer market. For those not well versed in the European football transfer market - here is a simple version. (Let me know if I get this wrong).

In the (European) football labor market if a player in one league (such as the English Premier League) is to be moved to another league (such as the Spanish Primera Division), then the team acquiring the player (say Real Madrid) must pay (although in many cases the price is zero) the team (Manchester United) relinquishing the player in a different league. Then the player that has changed teams old contract is nullified and a new contract is drawn up.

In 2009, Real Madrid paid 80 million Euros to acquire the rights to Cristiano Ronaldo. This transfer payment is what is being questioned by the Financial Times. Notice in the article, that Stefan Syzmanski reports that a teams payroll by itself explains 92% of team performance, but that the transfer fees by itself can only explain 16% of team performance. UEFA warned that such transfer fees would deteriorate competitive balance, an argument I seriously doubt.

One way to think about this is that this is a two-part tariff (or two part pricing). The transfer fee then should not explain performance very much as it is designed to extract the teams surplus, which may very well be highly independent of the teams performance.

Financial Losses in NCAA Football Bowl Games

2011-12-14T07:41:00.001-06:00

As the NCAA FBS season moves toward bowl games, here is an excellent article from CFO Magazine on the finances of college football bowl games.

Robin Hood Tax

2011-12-12T07:54:00.001-06:00

A proposed small tax on financial trades are growing in popularity as a means in which income can be re-distributed from the wealthy to the poor, which is being referred to as a Robin Hood Tax. This is similar to the Tobin tax - originally suggested by Nobel laureate James Tobin after the collapse of the Bretton Woods foreign exchange rate system in the 1970's.

Many are in favor of this type of tax, as they would not be directly effected by the tax, since they are not directly trading financial assets, and it would raise tax revenue to support government policies that would benefit the poor.

As I show in Prin. of Microeconomics, the burden of a per unit tax (i.e. the ones who will pay more of the tax) falls on the side of the market that is more price inelastic (less sensitive to changes in prices). As financial market suppliers are highly price sensitive, I think this type of a tax (if it is a per unit tax) would fall less on the banks and more on private investors and pension funds.

Additionally, the deadweight loss of the tax (loss to society due to government intervention in the market) would be rather high, as both the demand and supply elasticities are rather high.

NCAA and Title IX

2011-12-07T07:09:00.000-06:00

How has Title IX affected college athletics? There are many different views. Here is a short piece from the USA Today with one view.

Notice that Title IX compliance can be achieved in one of three ways. The most used in proportionality of sports or scholarships with the proportionality of undergraduate students. Another way is for the academic institution to have a history of expanding opportunities for women. The third is more controversial, using a survey model to meet Title IX compliance.

Sims & Sargent: Noble Laureates in Economics

2011-12-06T08:13:00.000-06:00

The New York Times has a nice piece on the life and work of the two recent Nobel Economics Laureates.

Point Shaving in the NCAA

2011-12-05T07:04:00.009-06:00

A few weeks ago, Hawaiian police were investigating whether the University of Hawaii football team was "point shaving". Point shaving is when a team intentionally reduces their effort so that the outcome of the game falls on one side or the other of the "point spread" - the number of points that book makers set in sports betting markets.

Economists have looked into this type of behavior previously as I blogged about a number of years ago, and today in Sports Economics we will look at this research - which in no way is conclusive. Some of the readers of the Wages of Wins blog were unimpressed, so I wrote a response to some of the critics of this research.

The USA Today reported that point shaving may have occurred at the University of Toledo in 2007, and subsequently in 2008 the FBI initiated an investigation of a the University of Toledo football player in regard to point shaving. The FBI football point shaving investigation also spilled over to the Toledo University basketball team. In 2009, indictments handed in Toledo point shaving case.

NCAA Mens Basketball Tournament Selection Criticism

2011-12-02T07:11:00.002-06:00

Not everyone was happy with last years NCAA men's basketball tournament selections. See also Billy Packer's comments, and don't forget Charles Barkley's comments.

Moral Hazard and Flooding

2011-11-26T10:25:00.000-06:00

Here is a story from the New York Times on the floods in Sioux City. One of the issues raised in the article is the incentives that people have building nearer to rivers with government disaster assistance. This is an example of moral hazard.

amazon and e-book prices

2011-11-26T08:55:00.000-06:00

The New York Times reports that Amazon is using its large market share in e-books to impact the pricing of e-books - similar to what we observe in the dominant firm model.

Turkey Prices

2011-11-24T07:43:00.005-06:00

HAPPY THANKSGIVING!

In honor of the US holiday today let's talk turkey. The Financial Times is reporting that US grocers are selling turkeys at a retail price ($0.49/lb) below the grocers wholesale prices ($1.19/lb). Now if price is less than the average variable cost of selling a good/service then economic theory tells us that a firm should not sell the good or service since the loss of selling is greater than the loss of not selling. So why?

On the other hand, if the firm can sell other goods or services (such as stuffing and gravy) along with the "loss-leader", and the profit from the other goods is greater than the loss on the turkey, then this is consistent with profit maximization. In economics we call this cross-subsidization, and this is a tasty example of it.

Boeing and Orders Committment

2011-11-21T07:43:00.000-06:00

When I talk about oligopolies, one of the models I refer to is the Stackelberg oligopoly model. To make things easy, I usually just refer to the two firm Stackelberg model where the good sold by each firm is homogeneous (standardized). After solving for the optimal conditions, we look at the output and profits from this model -where one firm moves first - to the Cournot model where both firms move simultaneously. One of the points of doing this is to show that moving first in a quantity game leads to higher profits.

One of the immediate questions is: how can a firm move first? The answer I focus on is through commitments. Now the Financial Times has a nice piece on Boeing receiving a commitment from Singapore and Lion Air to purchase a large number of their 777 airplanes, and this fits well with the spirit of the model, although the real world is more complicated than this simple commitment model.

NCAA Division I Revenues and Expenses for 2009-2010

2011-11-18T07:16:00.002-06:00

The USA Today reports that 22 of the 218 Division I schools finished in the black financially for the 2009-2010 academic year. Here is the table from the article.

School	Total revenue	Generated revenue	Allocated revenue	Total expenses	Difference

Oregon	$122,394,483	$119,709,341	$2,685,142	$77,856,232	$41,853,109*
Alabama	$130,542,153	$125,562,153	$4,980,000	$98,961,214	$26,600,939
Penn State	$106,614,724	$106,614,724	$0	$88,041,921	$18,572,803
Michigan	$106,874,031	$106,640,861	$233,170	$89,133,850	$17,507,011
Oklahoma State	$106,362,128	$100,708,922	$5,653,206	$83,748,207	$16,960,715
Iowa	$88,735,093	$88,209,386	$525,707	$74,438,196	$13,771,190
Texas	$143,555,354	$143,555,354	$0	$130,436,534	$13,118,820
Oklahoma	$98,512,287	$98,512,287	$0	$87,678,199	$10,834,088
Georgia	$89,735,934	$86,533,389	$3,202,545	$77,250,831	$9,282,558
LSU	$111,030,795	$111,030,795	$0	$102,326,769	$8,704,026
Kansas State	$53,436,790	$50,201,682	$3,235,108	$42,337,682	$7,864,000
Florida	$117,104,407	$112,693,506	$4,410,901	$105,824,376	$6,869,130
Texas A&M	$82,774,133	$82,774,133	$0	$75,941,926	$6,832,207
Arkansas	$78,072,620	$76,377,647	$1,694,973	$71,801,905	$4,575,742
Purdue	$61,653,561	$61,653,561	$0	$58,365,143	$3,288,418
Michigan State	$83,545,892	$83,545,892	$3,348,785	$78,162,447	$2,034,660
Nebraska	$73,483,733	$73,483,733	$0	$71,738,068	$1,745,665
West Virginia	$62,030,104	$57,774,867	$4,255,237	$56,607,917	$1,166,950
Indiana	$69,287,811	$66,905,296	$2,382,515	$65,796,415	$1,108,881
Virginia Tech	$63,613,464	$56,706,913	$6,906,551	$55,738,633	$968,280
Ohio State	$123,174, 176	$123,174, 176	$0	$122,739,754	$434,422
Washington	$64,034,410	$61,851,895	$2,182,515	$61,640,598	$211,29
*School says unusual surplus is due to non-cash gift of John E. Jaqua Academic Center for Student Athletes. Note: Amounts not adjusted for inflation. Sources: USA TODAY research, individual schools

Using NBA Evaluation for NBA Draft

2011-11-14T07:50:00.000-06:00

Here's a good article on using NBA evaluation of playing talent for the NBA draft.

Local TV Mergers on the Rise

2011-11-11T08:20:00.000-06:00

The New York Times reports that there has been an increase in the number of mergers for local TV stations. Part of the reason is due to political advertising revenues, but to me the bigger economic driver is re-transmission rights - revenues gained to local TV stations of transmitting their content on cable and satellite television services.

Kraft Enters Energy Drink Market

2011-11-10T09:23:00.000-06:00

The Financial Times reports that Kraft is entering the energy drink market with MiO caffeinated drink.

Delonte West

2011-11-09T07:51:00.002-06:00

Delonte West says that he will be working at a furniture store during the NBA lockout. Economically - if this is accurate - this is interesting as an example of the difference in salary from working at your preferred job (in the NBA) and the salary from working in your next best alternative (furniture store). Here is an example of a significant difference in salary between the two.

Dominant Firm and Competitive Firm

2011-11-07T07:44:00.000-06:00

The Wall Street Journal has a good example of the dominant firm model that I talk about in my classes. Here Apple and Amazon are competing for customers and the competition revolves around the pricing of Lady Gaga music downloads. Specifically, Amazon is trying to get out of the price taking model that Apple has created, by trying to lure customers away with lower prices. Apple is not willing to change its pricing due to it having significant market share or it is acting like a dominant firm.

McDonald's and Starbucks

2011-11-01T07:23:00.000-05:00

Here's a nice piece on the impact that McDonald's and Starbucks are having on each other. (h/t Margy). Notice that the effect is driven significantly based on how consumers are responding to purchasing products (such as latte's at McDonald's) as opposed to Starbucks. Given the rather concentrated consumer perceptions of each brand, changing consumers perceptions is no small task. Enjoy.

Ticket Sales Entry

2011-10-24T08:46:00.000-05:00

Eventbrite (among others) are new ticket sales entrants, competing where Ticketmaster does not, in the small event ticket market.

Entry into Oligopoly Markets

2011-10-21T07:32:00.000-05:00

The Financial Times has an interesting article on the competitive effects of the netbook. In essence the article implies that the incumbent oligopolists were moving in the direction of more computing power for laptops (which I am using to write this blog) and that entry by Asus and Acer in producing and selling netbooks has changed this oligopolistic market.

Video Game Player Innovation

2011-10-18T08:43:00.000-05:00

Nice piece on innovation and production differentiation by Nintendo in video game players.

Smartphone & Smartphone Operating System Competition

2011-10-14T08:21:00.000-05:00

Interesting article from the New York Times on smartphones and smartphone operating systems. Notice from the graphic on the page linked above, that the HHI for smartphone operating systems is highly concentrated at over 2800.

Texting Competition

2011-10-13T08:11:00.000-05:00

The New York Times has an article on the impact that new texting competitor's may have on cellular carriers. It is an interesting way to think about how close substitutes (various text suppliers) impact the price - here for texts. We will be looking at the Bertrand product differentiation model soon, and this is a good example of how prices will converge to marginal costs.

If you missed this - the article claims that the cost of sending a text is 0.33 cents and that can result in a greater than 4000% mark-up.

2011 Nobel Prize in Economics

2011-10-12T07:14:00.000-05:00

This years recipients of the Nobel Prize in Economics are Thomas Sargent and Christopher Sims.

Daily Iowan Gold Standard Story

2011-10-11T09:01:00.000-05:00

Here is a story from the Daily Iowan about the debate with regard to the Gold Standard. Please note: I would not consider myself a Keynesian economist as stated in the article.

Report on Market Power in Australian Electric Markets

2011-10-10T07:37:00.000-05:00

An excellent report by the NERA economic consulting group on uncovering market power in the Australian electric market (PDF file). They also do a great job on market definition.

Milwaukee Brewers Owner

2011-10-08T07:44:00.001-05:00

Nice piece on the largest percentage owner of the Milwaukee Brewers from the NY Times.

Economist Co-Awarded Nobel Peace Prize

2011-10-07T09:55:00.000-05:00

Johnson-Sirleaf, a Harvard trained Economist was co-awarded the 2011 Nobel Peace Prize. It's about time.

NBA Talent Evaluation - New Orleans Hornets

2011-10-06T07:02:00.000-05:00

Dave has a great piece on evaluating the New Orleans Hornets.

NBA Efficiency Measures

2011-10-05T07:08:00.000-05:00

Dave has a great piece on NBA Efficiency measures.

Price War in E-readers?

2011-10-04T08:35:00.000-05:00

The Financial Times reports that Amazon and Barnes & Noble's may be in price war and their stock prices fell after they each announced a decrease in the prices of their e-reader's.

Price War in ETFs

2011-10-03T07:46:00.000-05:00

Prices on commissions for ETF (Exchange Traded Funds) are now falling in Europe. This is a fine example of a price war. As one firm lowers the price (commission on trading the securities) other firms react in kind, which sends signals to keep lowering prices, or what I call a price war.

How to fix the Economy - No it is not that simple

2011-10-01T07:51:00.000-05:00

A friend of mine posted this on Facebook from a letter to a newspaper on how to fix the economy: "There are about 40 million people over age 50 in the work force. Pay them $1 million apiece severance with these stipulations: They leave their jobs, which means 40 million job openings. Unemployment fixed. They buy new American cars; 40 million cars ordered. Auto industry fixed. They either buy a house or pay off their mortgage. Housing crisis fixed. Some people make things so complicated when they don't have to be. This is a lot less than the billions given to banks and insurance companies." You can find the article here.

There are a lot of problems with this suggestion, but let's take the most obvious. This US government program would cost $40 trillion. In case you missed it, that is a 4 followed by 13 zeros. That would be more than two times the current US government debt, or 2226 times our current domestic income. In other words, assuming zero interest and assuming a simple loan all final domestic income is used to pay for this program, the US would pay it back in the year 4237.

2011 NFL First Round Draft Pick Salaries

2011-09-30T07:37:00.000-05:00

The new NFL collective bargaining agreement has significantly reduced NFL first round draft picks salaries. Here is the list.

Yankees Luxury Tax Bill

2011-09-29T07:57:00.000-05:00

Here is a short piece on the New York Yankees luxury tax bill.

Demand and Recreational Boating

2011-09-28T07:33:00.000-05:00

KCRG reported that some Iowa boaters think that rising gas prices are the reason for fewer boating accidents this year in Iowa. The argument goes something like this - as gas prices increase the amount of time boating decreases (i.e. the law of demand) and thus with fewer boats on the water, there are fewer boating accidents.

Baseball and Salary (Payroll) Caps

2011-09-27T08:18:00.000-05:00

In 2009, some MLB owners called for a salary (payroll) cap. In my sports class we look at the implications of a payroll cap on competitive balance, and the Fort & Quirk version that payroll caps have no influence on competitive balance and the Vrooman version that payroll caps decrease competitive balance.

Decling Concentration in US Auto Market

2011-09-26T07:30:00.000-05:00

The Economist has a nice article on recent changes in the US auto market. One of the implications is that the US auto market is less concentrated that in the recent past, indicating greater competition.

Transportation Firm Market Power?

2011-09-23T07:40:00.000-05:00

The Surface Transportation Board in New York has stated that Stagecoach, a tourist/sightseeing transportation company, has excessive market power. Stagecoach has about 90% market share after their merger with CitySightsNY. Subsequently Stagecoach increased prices from 10% to 17%, and the transportation authority reasoned that this represents excessive market power.

Preliminary NCAA Top 25

2011-09-21T22:15:00.002-05:00

Here is a very preliminary NCAA Top 25 ranking based on an NCAA production model that I have created. I hope to be posting each week as the season progresses as to the top 25 NCAA FBS teams in the nation.

Zuffa Revenues

2011-09-20T08:51:00.000-05:00

A short article on Zuffa's (UFC) finances.

Hyundai, Price and Market Share

2011-09-19T07:09:00.000-05:00

The New York Times has a nice piece on the impact that Hyundai's low price strategy has on market share. Hyundai's market share has been increasing in the US (and globally), while many of Hyundai's rivals have been losing market share.

JC Bradbury on Sports Stadium Subsidies

2011-09-10T09:05:00.000-05:00

This is a good article on sports stadium subsidies.

European Antitrust Exemption to promote Competitive Balance?

2011-09-09T08:47:00.000-05:00

In 2007, European football (soccer) clubs sought an competition policy (antitrust) exemption and one of the justifications for this was so that European clubs could better promote competitive balance. As we see in chapter 4 of The Wages of Wins, European football (soccer) is much more balanced than American football, baseball, hockey or basketball. As I mention in class, one possible reason for owners justifying their latest cause (payroll caps, revenue sharing, antitrust exemptions, etc.) is to use competitive balance as the objective. As we show in chapter 4, league policies have little effect on competitive balance as compared to the underlying population playing the game.

Big 12 and Fox Sports

2011-09-08T07:56:00.000-05:00

FOX Sports recently completed a deal with the Big 12 conference (with only 10 schools and if Texas A&M can leave - only nine schools). I wonder how this deal might change if Texas A&M leaves or if other schools follow.

Michigan Football Scheduling

2011-09-02T08:09:00.000-05:00

The athletics director at the University of Michigan is unwilling to have the football team play non-conference away games, except for Notre Dame. Why? Revenue. Michigan has the largest NCAA football stadium and generates much more revenue at home than away.

In fact, the Big 10 (with 12 schools) has discussed increasing the number of conference games, in part for this exact same reason. Teams would not have to pay "guarantees" to non-conference opponents playing at one of the Big 10 schools venues, and since the guarantee prices have been rising, it is more profitable to play more games against Big 10 opponents than non-conference opponents.

Moneyball Movie

2011-09-01T07:54:00.001-05:00

Sports and statistics has hit the mainstream - first with a #1 bestseller - Moneyball by Michael Lewis, and now the movie staring Brad Pitt (I'm not making this up) as Billy Bean. Here is a short piece mentioning the movie and The Wages of Wins.

NBA Lockout and NBA Fans

2011-08-31T07:43:00.000-05:00

ESPN reported after the 2010-2011 playoff season that some NBA players were worried about how fans will react to an NBA lockout. As we show in chapter 2 of The Wages of Wins, fans did not significantly change their attendance behavior in the previous NBA lockout, or the NFL strikes, NHL season cancellation or MLB strikes/lockout.

Past Shutdown at GM

2011-08-30T08:28:00.000-05:00

General Motors shutdown thirteen plants in 2009 due to declining demand. As I show in some of my economics classes, a firm has an incentive to shutdown (temporarily cease operations) if the price of the product is less than the per unit production costs (average variable cost). One way this can happen is if the demand for the product/service declines (shifts to the left), reducing the product price below average variable cost.

Farmers Markets and Free Entry

2011-08-29T07:14:00.001-05:00

In some of my economics courses I talk about the competitive firm (and market) as an example of firm decision making. One of the characteristics of a competitive firm is free entry, which is when a firm can costlessly enter a new market. This is a rather strong assumption since it is so rare - if it occurs at all, but it does make the argument easier, and relaxing this assumption allows us to talk about other economic issues later in those courses.

Here is an example of a free entry (almost). The New York Times has a great article on the increase in the number of farmers markets here in the United States. Over 1000 new farmer's markets have been created this year alone. The competitive firm model shows that firms will enter a market if the price is greater than or equal to average variable cost in the short-run, and the competitive firm model also shows that firms will stay in the market if price is greater than average total cost in the long-run. This seems to be the issue at hand in the article. Farmers are entering new markets, but some are unable to remain in the new market.

Additionally the competitive firm model shows that as firms enter the market, the firms prices start to fall and the firms profits also decrease; which is exactly what is happening in many of these farmer's markets.

Not all farmer's are suffering lower profits. Some geographic markets have limited farmer's markets, and thus the entry issue is not a problem.

A Critique of Academic Economists

2011-08-27T08:17:00.003-05:00

The Financial Times has an interesting read on the science of economics, especially with respect to macroeconomics (DSGE models) and financial economics. If you are interested in economics at all, you should read this.

Food and Price Elasticity

2011-08-26T07:19:00.000-05:00

The Financial Times reported that foodmakers have increased their sales despite having to increase food prices. Since firms selling food have increased their prices and also increased their sales, the total revenue test tells us that for this to occur, food must be price inelastic.

Panchero's and the Law of Demand

2011-08-25T07:41:00.000-05:00

On Tuesday, we saw the law of demand in action here in Iowa City. Panchero's, a local resturant, was selling burritos for $1, which is significantly lower than the regular price. Lines of hungry burrito fans waited to purchase a burrito. Normally there are not lines out the door for burritos at Panchero's, no matter how much they are liked. So why the lines, the law of demand. As a firm lowers the price of a good/service, such as the wonderful burrito, consumers on average demand more, which is exactly what we saw downtown.

Additionally, we can hypothesize about the price elasticity of demand for the Panchero burrito. If, as the article states, Panchero sold 1200 burritos last year at a price of $1, and if they normally sell 400 at a price of say $5, then we can estimate the price elasticity of demand for a burrito and determine if the consumers are price elastic or price inelastic for burritos. In the hypothetical example the price elasticity is elastic, using the mid-point formula.

Sweet Potato and Demand Curves

2011-08-24T08:25:00.000-05:00

One of the most fundamental ideas that I talk about in my economics courses is the idea of consumer demand. In those discussions, I talk about factors (or variables) that shift the demand for a good or service, such as a change in the tastes or preferences for a good or service. Often I am asked for examples of these, and here is a great example of the change in demand (shift in the demand curve) for the sweet potato.

A few years ago, the sweet potato had a very seasonal (Thanksgiving) consumer demand. No longer. This change in consumer demand for sweet potatoes is also changing how much firms (farmers) are planting and harvesting of this highly sought after spud.

Demand, Price and Buffalo Meat

2011-08-23T07:36:00.000-05:00

Consumption of buffalo (bison) meat has been rising over the last year. In fact a bison rib-eye sells for more than $10 a pound than beef. Why - demand and supply. Consumers of meat are demanding more grass-fed and thus typically lower fat meat, which are both in bison meat.

Profit Motive

2011-08-22T08:22:00.001-05:00

What is the business of business? Milton Friedman claimed it was to increase profits - that's it. Others say it is to increase social well-being. The New York Times reports that there may be a middle ground, that Porter and Kramer called shared value. Shared value is a concept in which firms focus on social problems in order to make a profit, and usually fits with the firms core business skills. Thus firms that are efficient in the production of some type of good or service also produce similar goods/services that solve or mitigate some social problem for a profit. Hence the shared part of shared value.

Generic Drugs and Market Shortages

2011-08-20T09:10:00.013-05:00

In today's New York Times there is an article about drug shortages and the impact that is having on patients that cannot get the drugs they need. Normally, I am skeptical when I read a popular press article about a shortage, as it usually ends up being the case that there is not an actual economic shortage, but rather a decreased supply (at higher prices), which is an equilibrium market result. But here is different; and for three fundamental reasons that are inter-related, but in which I will separate in order to make the economics easier to grasp. One is changes in the demand and/or the supply of the generic drug; the second is a change in the market conduct of generic drug firms, and the last is government imposed. Let's take them in order.

First, a little economic revue. The supply and demand model shows us that when both demand and supply are stable then the market will produce an equilibrium price and quantity. If the demand for the product changes then the equilibrium price and quantity change in the same direction (increase in demand leads to an increase in price and quantity), and if there is a change in supply then the equilibrium price changes in the opposite direction and the equilibrium quantity changes in the same direction (increase in supply leads to a decrease in price and an increase in quantity). Economists tend to assume (in a Principles of Microeconomics course) that the changes in quantity are instantaneous, which at the Principles level is a simplifying assumption.

Reality is another matter. The FDA and the ASPH both have lists of current generic drug shortages, where the FDA site states the reason for the shortage on that page, and the ASPH you have to click on the drug to get more information. Most cases are due to increased demand or manufacturing or capacity issues. Both of these are transitory disequilibrium (i.e. shortage) issues, and seem to be resolved within a few months. So the shortage occurs since the physical manufacturing constraints are unable to change as quickly as the market changes.

A related reason for a shortage occurs due to input constraints. Input (called Active Pharmaceutical Ingredients or API) constraints occur when generic drug manufacturers face limitations on the amount of the API they can purchase to produce the generic drug. Like the changes in demand and the manufacturing issues, these tend to be temporary shortages.

A second type of reason is what I will call a market conduct issue, where decisions made by generic drug manufacturers are affecting the generic drug market and either directly or indirectly leading to shortages. The most obvious is exit, where an existing generic drug manufacturer no longer produces a generic drug. For example, here is the press release for Teva's exit for Metoclopramide Injection, USP. Given that an existing firm exits the market, and there is no equal reduction in demand, at existing prices there will be a shortage until either another firm steps up production to meet the supply reduction, prices rise to the market equilibrium price or another substitute generic drug becomes available filling the supply reduction.

Another market conduct reason is generic drug firm consolidation. Economic theory shows us that as firms consolidate, the market equilibrium quantity decreases. In reaction to the existing shortages of generic drugs (and indirectly industry consolidation) a group of oncologists (cancer physicians) are starting a not-for-profit firm to import some of these drugs and eventually manufacture some of these drugs.

A final market conduct reason is profitability. Some generic drugs simply cannot be made profitably here in the United States, and thus potential competitors choose not to enter some generic drug markets.

The last reason is government imposed. Most of these tend to be that a governmental agency has found some type of manufacturing violation (microbial contamination), and thus caused the generic drug manufacturing facility to temporarily cease operations to protect public health. Other governmental issues, such as labeling violations are temporary. Other governmental issues, such as price ceilings or trade bans are more serious economically, as these can have substantially longer delays.

Privatize the FAA

2011-08-16T11:27:00.000-05:00

The Economist reported that the US Congress could not agree on a funding extension for the FAA primarily due to a disagreement over a $16.5 million subsidy for remote airports. As a result the US government is losing $30 million A DAY in uncollected federal taxes on airline tickets. My solution is for the US Congress to solve this problem by allowing the FAA to be privatized. The US government still could collect the airline ticket taxes and the private firm could charge airports and airlines for their services. At least a private firm(s) would be more efficient.

Game Fixing

2011-07-25T07:22:00.001-05:00

The New York Times has an interesting article on game fixing in European football (soccer). The Wall Street Journal had an interesting article on the new role that oddsmakers have in game or match fixing. A few years ago, I wrote about the impact of match fixing in tennis.

The problem with game/match fixing is that it reduces the uncertainty of outcome for the game, and thus impedes the "integrity" of the game. It is perceived that if fans know the games are fixed or predetermined, then spectator attendance will fall. I do not doubt this, but we all know that the WWE is pre-determined and spectator attendance does not seem to be adversely affected.

My guess is that fan attendance will not change much (statistically) if these allegations of match/game fixing are proven, much like fan attendance did not change (statistically) after the labor stoppages in the NBA, MLB, NFL or NHL over the last few decades. See chapter 2 of The Wages of Wins for a more in depth discussion.

Supply and Demand at Iowa City Animal Center

2011-07-22T10:18:00.000-05:00

The Daily Iowan recently reported that the Iowa City Animal Center is reducing the prices for adopting cats and dogs. Why? You guessed it - supply and demand. Specifically, there has been an increase in the number of cats and dogs at the animal center (i.e. an increase in the supply of cats and dogs). The Supply and Demand model predicts that as the supply of a good/service increases (or as I say in class - shifts to the right) the market equilibrium price falls, which is exactly what is happening at the Iowa City Animal Center.

NCAA Men's Basketball Tournament Selection

2011-07-20T08:41:00.000-05:00

During the recent NCAA men's basketball tournament selection, some commentators questioned the tournament selection committee's choices for the NCAA men's basketball tournament. This is one of the topics that I discuss during sports economics - specifically looking at the factors that are statistically significant in being part of the "Big Dance" or not.

Cost and Consolidation

2011-07-19T07:29:00.000-05:00

The Financial Times reported that airline firms were in merger talks as a result of higher input prices. In Managerial Economic (along with Industry Analysis) we look at a fairly simple horizontal merger model. In that model we explore how changes in cost can affect the profitability of the firms post-merger. Here is an example of how increases in input prices (i.e. costs) can lead to firms wanting to increase the scale of their operations as a means to spread out their costs of greater amount of customers. Notice that this works better when the costs involved are fixed or quasi-fixed from the firms perspective.

Upstream Firm Pricing

2011-07-18T08:14:00.000-05:00

When an (upstream/manufacturer) firm sells to another (downstream/retailer) firm, the pricing problem becomes more difficult. The upstream firm only has feedback from the other firms they are selling to and does not clearly see how the final customers are reacting to the price of their manufactured products. The easiest way to tackle this problem theoretically is to assume that both the upstream and downstream firms are monopolists, which I do in Industry Analysis and the MBA Managerial Economic courses. Here is a nice article from Business Week that ties some of these theoretical ideas for those wanting a jump on this pricing problem.

The Superstar Effect on Income Inequality

2011-07-14T08:03:00.001-05:00

The New York Times has a great article on the effect that top paid athletes have on the distribution of income of athletes in similar positions. The article refers to Rosen's paper on the "Superstar effect", which basically states that superstar workers are earning significantly more income now because technology is allowing these workers performance to reach greater audiences, and thus the value of their labor is higher.

New Jersey Nets Financial Statements

2011-07-08T07:59:00.001-05:00

Here is a really nice article about the financial status of the New Jersey Nets from 2004 to 2006. You can also download the financial reports for those years in PDF. With the NBA lockout in full swing, the article does a nice job (after the corrections) of showing that while a team may claim a financial loss, that does not mean that the team is making an economic loss. Sometimes this difference is missed in the discussion, and thus what is claimed as an accounting loss is from an economic standpoint actually a gain. While the New Jersey Nets may not be a typical example (or maybe they are), it does point to the bigger picture in regard to whether the NBA economic system as it stands is really "broke" as the NBA Commissioner claims.

Additionally, here is an analysis (using Forbes data) of the NBA's financial situation compared to other sports leagues a piece disputing the NBA claims of financial troubles.

What Should the NFL Labor Market Look Like?

2011-07-07T08:14:00.000-05:00

NFL Commissioner Roger Goodell wrote an op-ed piece in the Wall Street Journal on this very question. Goodell's view is that the NFL's current collective bargaining system should remain primarily as it current is structured. The players (and their representatives) have asked that the labor market be significantly changed as is laid out by Goodell in the op-ed piece posted above.

Thus the question is about the structure of the NFL labor market. Should it be based on market forces or on agreements between the owners and a labor union of football players? The owners want a unionized labor market, and the players want a free labor market.

Goodell states that one of the successes of the current NFL labor market system is competitive balance. I disagree. Yes, the NFL relative to other sports leagues like the NBA and MLB are more competitive balanced. But not because of the current NFL labor market. The NFL had greater competitive balance before the current collective bargaining agreement's (CBA's) than the NBA and MLB, and since the CBA era, competitive balance has not changed much in the NFL.

Goodell states that the players want a labor market in which every in-coming player is a free agent (i.e. no entry draft) and upon completion of their contract, every player is again a free agent (i.e. no franchise tags limiting a player from negotiating with other potential employers).

Goodell implies that a handful of players will end up on the highest revenue generating teams, and that many teams will end up as "farm" teams of those with higher revenues. Thus to avoid this, the players will have to give up some of their labor rights and work under a collectively bargained system.

ESPN & Wimbledon

2011-07-06T10:21:00.002-05:00

ESPN has purchased the rights to broadcast Wimbledon for the next 12 years, interrupting NBC's 43 consecutive year span. This is has been a growing trend for the cable sports channel.

Netflix's Product Strategy

2011-07-05T08:39:00.002-05:00

The New York Times has an interesting article on Netflix's recent product (or service) strategies in the home entertainment market. Netflix has been changing from a DVD by mail entertainment provider to an increasingly streaming entertainment provider and as the demand for these services have been increasing, Netflix has been able to increase the price charged for these services.

The change from a mail order DVD rental firm to a entertainment home streaming firm is also having an effect on both content producers, such as Sony, and other entertainment providers, such as cable companies. Recently cable companies have been losing customers, in part due to customers switching cable to firms like Netflix.

Additionally, Netflix has benefited from a lack of competition, but companies like Hulu will have an increasing incentive to offer these types of services.

Deron Williams vs. Chris Paul

2011-06-30T07:41:00.000-05:00

Dave has a great article comparing Williams and Paul.

How are MVP's Determined in the NBA?

2011-06-29T08:40:00.000-05:00

Dave Berri has a nice article on evaluating whether Derrick Rose should be the MVP in the NBA.

Duopolist Response to Potential Competition

2011-06-28T08:08:00.000-05:00

Airbus and Boeing are currently excellent examples of a duopoly in the production of single aisle passenger jets, with the workhorse models being the A320 and the 737 respectively. The Economist reported that Airbus and Boeing's customers (airline firms) are interested in greater fuel economy from these planes. Given the increase in competition from Bombardier and Embraer and potential competitors in Russia and China, The Economist reports that the incumbent duopolists are responding by making improvements in the jet engines to meet the demand of their customers and to try to hold off the encroachment of potential competitors.

NFL Owners Seek Rookie Contract Restrictions

2011-06-20T09:02:00.004-05:00

The USA Today reports that some type of rookie contract restriction is being discussed between NFL owners and NFL player representatives. In Sports Economics I go through the likely effects of payroll caps, and I thought I would give the big picture on the cautions of a contract restriction.

First and foremost, the payroll cap is a restriction on the earnings of an employee, and in the case of rookies, it is a salary restriction on top of a restriction as to where to work (i.e. the entry draft). From the article it also seems that the negotiations are also in terms of the length of the contract as well. Each of these restrictions tend to make the labor market less efficient, and from an economic point of view this efficiency reduction is a loss to society.

If labor market efficiency is not that important to you, then from the players perspective a rookie contract restriction can lower incumbent players future salaries. How? In some cases, the rookie salary sets the bar for future players salary negotiations, and with that amount lower, some positions may end up seeing significant reductions in the growth rate of their future salaries. Quarterbacks and defensive ends come to mind as positions that may be affected by lower salary growth, since the bar would be set much lower with the rookie contract restrictions.

Economic Impact of Reducing Ethanol Subsidies

2011-06-18T09:12:00.000-05:00

The Daily Iowan has an article on the recent bill in Congress trying to reduce ethanol subsidies, and the reactions by various politicians to the bill. In Prin. of Microeconomics I discuss the economic impact of introducing a per unit subsidy and eliminating a per unit subsidy, such as the 45 cent per gallon subsidy. Economically, we can expect that consumers will pay higher prices (the market price) and thus have a reduction in consumer surplus (i.e. consumer economic well-being), ethanol producers have lower producer surplus, and the government lowers their expenditures. So both consumers and producers are worse off, and the government is better off. Can we make a clear economic conclusion just from the elimination of the per unit subsidy? Yes. Economically, we can expect (all else being equal) that the elimination of the subsidy will increase overall economic well-being, and thus economists as a profession tend to favor the elimination of subsidies.

Not only that, but the proposed amendment also plans to eliminate the tariff (i.e. tax) on importing ethanol. Again, all things being equal, the elimination of this tariff will make US gasoline consumers better off, since this will allow more efficient foreign producers to sell ethanol here in the US, and quite likely make the price of blended ethanol-gasoline cheaper than it currently sells for.

Should the Big 10 Change the Number of Conference Football Games?

2011-06-17T08:36:00.001-05:00

The USA Today reports that the Big 10 athletic directors are discussing whether the conference should have nine (instead of the current eight) conference football games. Since most (if not all) schools already have scheduled into 2015, the change would not take place soon. Yet there are some reasons to consider it. One, as mentioned in the article, is that there is demand for more conference Big Ten games.

Two is financial. As mentioned in the article, Purdue athletic director Morgan Burke, "... The one thing we'll look at and we need to understand for the entire league is what are the financial implications of going to nine games." That includes the cost of hosting non-conference games, which are called guarantees. In 2009, the University of Iowa paid $900,000 for Arkansas State to play at Kinneck stadium. Those costs have been rising, and this increase in cost is making hosting non-conference games less financially beneficial, although scheduling weak non-conference opponents does boost the expected team's winning percent. By switching from an eight Big Ten conference game schedule to a nine conference game schedule, the school hosting will not have to pay any guarantee to it's additional Big Ten rival, which reduces the costs for that one game and will most likely increase the revenues if demand for the game (and hence the ticket prices charged) is greater.

Auburn NCAA Football Title Loss

2011-06-16T08:37:00.000-05:00

Auburn recently played in the NCAA BCS football title game and lost - money that is. According to the Ledger-Enquirer, the Auburn Tigers lost over $600,000. While a spokesperson for the university said that the reason for the loss was the distance traveled, another reason could be the cost of unsold tickets - Auburn incurred a $781,825 loss from unsold tickets, or uncharged tickets.

Some have told me that NCAA BCS football bowl games are not designed to be money makers, but rather a way of rewarding select individuals for long-term team loyalty, and hence many college and universities incur a loss during bowl games. That does make some sense, especially if the college/universities athletic department is self sufficient, but not if the loss is subsidized from other college/university expenditures.