Showing posts with label Price Ceilings. Show all posts
Showing posts with label Price Ceilings. Show all posts
Monday, February 22, 2016
Chinese Price Ceilings and Prescription Drugs
The Wall Street Journal reports that China will be removing price controls on prescription drugs. As demonstrated in Prin. of Microeconomics, price controls (price ceilings) result in a decrease in output produced by firms and while they may increase consumer welfare (depending on the impact of the difference between the gains consumers receive from lower prices and the losses consumers face from less consumption); price ceilings are welfare (i.e. economic well-being to society) reducing. The article above points this out as competition will likely increase due to the removal of price ceilings and thus put downward pressure on drug prices.
Saturday, February 15, 2014
More Price Control Problems in Venezuela
The Wall Street Journal reports that Venezuela shoppers are having a difficult time purchasing food staples and the reason is poor Venezuelan economic policy.
Not only food, but now the government of Venezuela has put price ceilings on new and used cars as reported by The Wall Street Journal.
I have written about this before with additional examples showing that price ceilings can result in significant shortages.
Not only food, but now the government of Venezuela has put price ceilings on new and used cars as reported by The Wall Street Journal.
I have written about this before with additional examples showing that price ceilings can result in significant shortages.
Friday, February 15, 2013
Price Ceilings and Shortages
As predicted in the supply and demand model, price ceilings (legal restrictions on how high the price a good or service can be set) will result in shortages. Here is an (unfortunate) example of just that in Venezuela as reported by the New York Times.
Here is my blog on this earlier using a different media source.
More Venezuelan shortages - this time due to price controls on coffee from the Wall Street Journal.
Are you noticing a pattern?
Here is my blog on this earlier using a different media source.
More Venezuelan shortages - this time due to price controls on coffee from the Wall Street Journal.
Are you noticing a pattern?
Saturday, February 11, 2012
Thursday, February 9, 2012
Consumer Reaction to Price Caps in Venezuela
Bloomberg news reports that consumers are buying large quantities of goods that will fall under new price caps (ceilings) in Venezuela, in an effort to control inflation. Karlin Granadillo, the head of a price control agency stated, "[t]he law of supply and demand is a lie..." in a TV report. Fair enough, let's take a look at what "the law of supply and demand" would predict when a government imposes a price ceiling and compare that with the actual behavior reported in the article linked above.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling, that the government set price will be below the market equilibrium price. CHECK.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling, that quantity demanded will be greater than quantity supplied resulting in a shortage. CHECK.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling and "black" markets occur, that the price in the black market will be greater than the government set price and people who purchase at the government price can resell the goods at the black market price and make a profit. CHECK.
The evidence does not support the hypothesis that the supply and demand model is a lie, and thus I must reject Granadillo's hypothesis that the supply and demand model is a lie in this case.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling, that the government set price will be below the market equilibrium price. CHECK.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling, that quantity demanded will be greater than quantity supplied resulting in a shortage. CHECK.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling and "black" markets occur, that the price in the black market will be greater than the government set price and people who purchase at the government price can resell the goods at the black market price and make a profit. CHECK.
The evidence does not support the hypothesis that the supply and demand model is a lie, and thus I must reject Granadillo's hypothesis that the supply and demand model is a lie in this case.
Monday, July 21, 2008
Why do we still have scalping laws?
Each year tickets for the Iowa-Iowa State football game go on sale and are snapped up lighting fast. What is a devoted Iowa football fan to do to get in to see their beloved Hawkeyes? One is to buy tickets from people selling outside of Kinnick Stadium - or to find someone willing to re-sell tickets online such as StubHub's Iowa football ticket market. In some states, reselling tickets (also known as scalping) is illegal. Does this make economic sense? Let's delve into the economics of the live event ticket market.
What goes into putting on a live event? You need three things: one, you need performers such as a music artist or a sporting event; second you need a venue to host the live event; and third you need some spectators to buy tickets to see the live event. Of course there are a multitude of other things that are needed, such as security and concessions, but here I am really only interested in focusing on the live event market.
For over 15 years, Ticketmaster has been the dominant firm in the live event market because they have locked up the most scarce resource - the venues. This is a very savy and profitable business model and has allowed Ticketmaster to be the dominant firm in the live event market since they have locked up the majority of venues here in the United States.
Let's think about the transaction for live events. Ticketmaster signs venues, such as Giants Stadium or the Rose Bowl to be the provider of selling live events for a price to each venue, and in turn contracts with artists and sports teams to sell tickets so spectators can view these live events. The venues - Giants Stadium - receive sales revenues from Ticketmaster which in turn is a cost to Ticketmaster. Live event artists receive sales revenue form Ticketmaster which again is a cost to Ticketmaster. (Ticketmaster passes some of its venue costs to performers). Ticketmaster earns sales revenue by selling tickets to spectators.
The market for live events has problems. Tickets for live events are typically either overpriced or underpriced. Ticketmaster Chairmen has said the industry "... prices its product worse than anybody else." When tickets are overpriced, tickets go unsold. In fact the concert industry estimates about 45% of all tickets are actually sold. When tickets are underpriced, ticket resales occur much to the chagrin of concert promoters - Ticketmaster - and performers - Tim McGraw and Faith Hill.
Additionally from 2004 to 2005, the average ticket price for a top 100 grossing live event increased by 9% and the number of tickets sold decreased by 7% - which is the law of demand. Also we can conclude that live event spectators are price inelastic - meaning that they are rather insensitive to changes in prices. This means that raising ticket prices will increase revenue - so concert promoters are leaving money on the table. Like I said, the market for live events has problems.
Compounding the problem are scalping (selling tickets for more than face value) laws. Scalping laws act as a price ceiling on the face value of a ticket. These laws only affect live events in which spectators cannot buy existing tickets - so they really affect only a small percentage of overall live event ticket sales. Stubhub (now owned by Ebay) has been at the forefront of overturning scalping and allowing markets to price tickets more efficiently. Craig Depken - a sports economist - has researched scalping laws and has shown that scalping laws actually increased ticket prices for baseball and football.
Stubhub (a secondary live event ticket reseller) benefits season ticket holders for live events that a season ticket holder cannot attend or find someone to purchase the ticket. With Stubhub - and similar vendors - season ticket holders can put single game/theater tickets up for sale and recoup some of the value from the tickets they would not have used. The secondary market may increase the amount of season ticket buyers, due to the lower opportunity cost of any unused season tickets. This could also benefit performers and venues if the resale option to season ticket holders increases the number of season tickets sold or at least reduces the attrition rate for season tickets. If performers/venues make money from concessions sales - having more people at the live event will mean more money in their pockets. You can't sell food or drinks to fans who don't show up!
In my research on NFL ticket prices I was able to show that each additional person in attendance at an NFL game increased concessions sales to NFL clubs by about $5 in 1995 prices. Overall, marginal non-ticket attendance revenues increased by about $37 in 1995 prices over the 1995 to 1999 seasons. Hence artists/sports teams benefit financially with secondary live event ticket markets. Additionally, artists/sports teams can offer these services on their website. My beloved Philadephia Flyers have a ticket auction on their (or now the NHL's) website.
Yet not everyone is happy. Ticketmaster only offers secondary live event ticket market services when it has a resale contract with the artist, team or venue. Thus for some live events, Ticketmaster is excluded from re-selling tickets that Stubhub is not. Ticketmaster may not be happy that some live events are being resold, but really this is a pricing problem that Ticketmaster needs to manage better. If Ticketmaster is interested in reducing live event ticket sales, Ticketmaster could set up an auction for tickets - much like priceline or eBay - and sell tickets to those who are willing to pay the most. This would significantly reduce re-selling; or Ticketmaster could lobby the government to enforce laws that reduce competition.
While setting up an on-line auction should greatly reduce reselling, will it be more profitable? Yes! Comparing the two pricing schemes, spectators willing to pay the most will add to the on-line sellers revenue more than for a uniform price in a certain section of seats. This is how airlines price, and while we might not like it - airlines make more revenues using this type of yield management pricing policy than an across the board pricing policy.
UPDATE 8/7/2008: The NFL and TicketMaster have created NFL Ticket Exchange - a secondary ticket market. Technology and profit-maximizing incentives are making scalping a dinosaur.
What goes into putting on a live event? You need three things: one, you need performers such as a music artist or a sporting event; second you need a venue to host the live event; and third you need some spectators to buy tickets to see the live event. Of course there are a multitude of other things that are needed, such as security and concessions, but here I am really only interested in focusing on the live event market.
For over 15 years, Ticketmaster has been the dominant firm in the live event market because they have locked up the most scarce resource - the venues. This is a very savy and profitable business model and has allowed Ticketmaster to be the dominant firm in the live event market since they have locked up the majority of venues here in the United States.
Let's think about the transaction for live events. Ticketmaster signs venues, such as Giants Stadium or the Rose Bowl to be the provider of selling live events for a price to each venue, and in turn contracts with artists and sports teams to sell tickets so spectators can view these live events. The venues - Giants Stadium - receive sales revenues from Ticketmaster which in turn is a cost to Ticketmaster. Live event artists receive sales revenue form Ticketmaster which again is a cost to Ticketmaster. (Ticketmaster passes some of its venue costs to performers). Ticketmaster earns sales revenue by selling tickets to spectators.
The market for live events has problems. Tickets for live events are typically either overpriced or underpriced. Ticketmaster Chairmen has said the industry "... prices its product worse than anybody else." When tickets are overpriced, tickets go unsold. In fact the concert industry estimates about 45% of all tickets are actually sold. When tickets are underpriced, ticket resales occur much to the chagrin of concert promoters - Ticketmaster - and performers - Tim McGraw and Faith Hill.
Additionally from 2004 to 2005, the average ticket price for a top 100 grossing live event increased by 9% and the number of tickets sold decreased by 7% - which is the law of demand. Also we can conclude that live event spectators are price inelastic - meaning that they are rather insensitive to changes in prices. This means that raising ticket prices will increase revenue - so concert promoters are leaving money on the table. Like I said, the market for live events has problems.
Compounding the problem are scalping (selling tickets for more than face value) laws. Scalping laws act as a price ceiling on the face value of a ticket. These laws only affect live events in which spectators cannot buy existing tickets - so they really affect only a small percentage of overall live event ticket sales. Stubhub (now owned by Ebay) has been at the forefront of overturning scalping and allowing markets to price tickets more efficiently. Craig Depken - a sports economist - has researched scalping laws and has shown that scalping laws actually increased ticket prices for baseball and football.
Stubhub (a secondary live event ticket reseller) benefits season ticket holders for live events that a season ticket holder cannot attend or find someone to purchase the ticket. With Stubhub - and similar vendors - season ticket holders can put single game/theater tickets up for sale and recoup some of the value from the tickets they would not have used. The secondary market may increase the amount of season ticket buyers, due to the lower opportunity cost of any unused season tickets. This could also benefit performers and venues if the resale option to season ticket holders increases the number of season tickets sold or at least reduces the attrition rate for season tickets. If performers/venues make money from concessions sales - having more people at the live event will mean more money in their pockets. You can't sell food or drinks to fans who don't show up!
In my research on NFL ticket prices I was able to show that each additional person in attendance at an NFL game increased concessions sales to NFL clubs by about $5 in 1995 prices. Overall, marginal non-ticket attendance revenues increased by about $37 in 1995 prices over the 1995 to 1999 seasons. Hence artists/sports teams benefit financially with secondary live event ticket markets. Additionally, artists/sports teams can offer these services on their website. My beloved Philadephia Flyers have a ticket auction on their (or now the NHL's) website.
Yet not everyone is happy. Ticketmaster only offers secondary live event ticket market services when it has a resale contract with the artist, team or venue. Thus for some live events, Ticketmaster is excluded from re-selling tickets that Stubhub is not. Ticketmaster may not be happy that some live events are being resold, but really this is a pricing problem that Ticketmaster needs to manage better. If Ticketmaster is interested in reducing live event ticket sales, Ticketmaster could set up an auction for tickets - much like priceline or eBay - and sell tickets to those who are willing to pay the most. This would significantly reduce re-selling; or Ticketmaster could lobby the government to enforce laws that reduce competition.
While setting up an on-line auction should greatly reduce reselling, will it be more profitable? Yes! Comparing the two pricing schemes, spectators willing to pay the most will add to the on-line sellers revenue more than for a uniform price in a certain section of seats. This is how airlines price, and while we might not like it - airlines make more revenues using this type of yield management pricing policy than an across the board pricing policy.
UPDATE 8/7/2008: The NFL and TicketMaster have created NFL Ticket Exchange - a secondary ticket market. Technology and profit-maximizing incentives are making scalping a dinosaur.
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