Market Power

Musings by an academic economist on the power of markets and the power over markets.

Saturday, November 27, 2004

Economic Freedom in Fargo/Moorhead

In the Pacific Research Institute’s Economic Freedom Index discussed a lot below, North Dakota ranked 18th in economic freedom and Minnesota ranked 44th. I just calculated the growth rates of population and personal income from 1998-2002 in the North Dakota and Minnesota parts of the Fargo-Moorhead metro area, another MSA that straddles state boundaries. The growth rates of both are higher on the North Dakota (Cass County) side of the border.


The Viking

I went out to eat last night with my family. We went to Timber Lodge Steakhouse, a chain of restaurants located mostly around the nort'lands. Each restaurant has the ambience of a nort'woods cabin. One of their steaks is called "The Viking." Here's its description in the menu:

"The perfect name for our center cut sirloin. They are big, bold, and after being beaten in 4 Super Bowls, you know they have to be tender."


Friday, November 26, 2004

Economic Freedom Index Part Trois

I’ve talked about the Pacific Research Institute’s Economic Freedom Index (EFI) in earlier posts. The folks at the PRI calculated the index to examine economic freedom between states as opposed to earlier studies that examined economic freedom between countries. We can also use this to examine economic freedom within cities.Metropolitan areas that straddle state lines provide a nice group to examine the EFI. People can move within these areas without having to uproot themselves from friends and family. Therefore, they can take advantage of economic freedom without the costs of migration to more distant lands. I expect that portions of metro areas that are in states with a lower economic freedom index (more highly-ranked) have more economic freedom and would have higher rates of net migration and income growth. I couldn’t find net migration data for this quick study, but I assume that the birth and death rates within metro areas would be fairly similar across state lines. So I use population growth rates as a proxy for net migration.

I gathered population and personal income data from the BEA’s Regional Economic Information System for each county within the Kansas City and St. Louis metropolitan areas. I gathered the county list for each metropolitan area from the 2003 Statistical Abstract of Missouri. Kansas City straddles the Missouri and Kansas border and, according to the 2004 index, both states rank in the top 10 in economic freedom. I calculated the growth rate of personal income and the growth rate of population between 1998 and 2002. According to the 1999 EFI, both states ranked lower (13th and 10th respectively), but were still closely and highly-ranked. So there may be a bit more population growth and personal income growth in the Kansas portion of the KC metro area, but not stark differences. A couple of figures bear that out.

Population growth is higher in the Kansas portion of KC than in the Missouri portion – twice as high. If you take out Wyandotte County in Kansas (contains Kansas City, Kansas) and Jackson County in Missouri (contains Kansas City, Missouri), the population growth rates for the remaining counties were 8.7% in Kansas and 7.4% in Missouri – not as much of a difference.

Personal income growth is slightly higher in the Kansas portion of the KC metro, but the differences aren't really stark. Take out Wyandotte County in Kansas and Jackson County in Missouri, and the remaining counties in Missouri have a higher personal income growth rate (24%) than the remaining counties in Kansas (22.4%).

The stark contrast comes when looking at the SL metro area. Missouri ranked 10th in the EFI and Illinois ranked 46th. In 1999, Missouri ranked 13th and Illinois ranked 36th.

Population growth in the Illinois portion is just under 1%, in the Missouri portion as a whole it is around 2%. Both rates are lower than the population growth rates for the Kansas and Missouri portions of the Kansas City Metro area. But taking out St. Louis City (which shrunk by 4.8% in population) and St. Louis County (which had a 0.0% growth rate) in Missouri, it is around 8.5% . Three Missouri counties (out of 9) had population growth rates above 10%. In contrast, no Illinois county had a population growth rate above 9% and only one out of 8 had a growth rate above 1.5% (Monroe, south of East St. Louis).

For the Illinois and Missouri portions as a whole, personal income growth was similar. But after taking out St. Louis City and St. Louis County, personal income growth in the remaining Missouri counties of the St. Louis metro area was over 25% from 1998-2002. Overall, only two of 8 Illinois counties had personal income growth rates above 20% (Monroe County lead the way with a 21.8% growth rate) while 6 of 9 Missouri counties had personal income growth rates above 20% (4 had growth rates of 27.9% or higher – the highest being Warren County at 29.7%). St. Louis County had the lowest personal income growth rate of the Missouri counties at 11.8%. It is also the county with the highest level of personal income of the Missouri counties (over 4 times as large as the next-highest level). That’s the primary reason why, overall, the Missouri and Illinois growth rates are similar.

I have family in Kansas City and a good friend of mine from my college years lives in KC, so I get there quite a bit. When I do go there, I visit restaurants and bars on both sides of the state line. I don’t have any family in St. Louis, so I did not go there nearly as often. When I did, I never went across the Mississippi River. When I was in graduate school at the University of Missouri, friends of mine would often go to St. Louis for entertainment. When they wanted decadent entertainment, they would go to “the east side” – East St. Louis – to visit the strip clubs. Other than that, they rarely traveled across the Mississippi River. I bet the factors driving the Economic Freedom Index go a long ways in explaining why they have little reason to travel across the river to the east side.


Thursday, November 25, 2004

Economic Freedom Index Part Deux

Here is another bit of information on the Economic Freedom Index from 2004 that I talked about earlier in this post. Below I post two maps: a map of the results of the 2004 general election and the map given in the EFI's executive summary. Note that all the blue states from the 2004 election (states that voted for Kerry) are red states in the PRI’s index map (states in the bottom quintile of the Economic Freedom Index meaning they are ranked lowest in the EFI). Only one state in the PRI's index voted for Bush (Ohio).

The only state in the EFI's bottom quintile that went Bush's way was Ohio. The only state in the EFI's top quintile that went Kerry's way was New Hampshire.


Economic Freedom Index Part Un

The Pacific Research Institute Released their Economic Freedom Index for 2004. The executive summary describes the methodology:

"The methodology consists of four parts: (1) we compiled a set of indicator variables for economic freedom and from that we created various data sets; (2) these data sets were converted into 48 unique indexes using different weighting techniques; (3) we compared each index to the others in terms of its ability to explain, other things equal, human migration; and (4) the index with the greatest statistical link to migration was chosen as the best and we used it to rank the U.S. states in terms of economic freedom."

The index uses human net migration as a primary dependent variable in an econometric model because people move to the places in which they have the best opportunity. The index uses 5 broad categories of variables to measure economic freedom: fiscal, regulatory, welfare, judicial, and government size. Among the criteria are minimum wage laws, right to work laws, tort laws, and environmental legislation.

Leading the way is Kansas. Bringing up the rear is New York. Here is the PRI's table ranking states from first to last.


Wednesday, November 24, 2004

You Better Watch What You Say

Alex Tabarrok at Marginal revolution had this interesting post on laser eye surgery. Don Boudreaux had this interesting post at Cafe Hayek on assessing one's critics.

Putting the two together, wouldn't be a shame if a proponent of socialized medicine read Alex's post and shrilled that laser eye surgery's price is too high and needs to be controlled.


Deregulation, Sioux City Style

The Iowa Utilities Board has decided to deregulate local telephone service in 20 markets in Iowa – but not my home town of Sioux City. See here for some details.

Here is a quote from the article:

“In a 2-1 vote, the board ruled that the Sioux City market doesn't have enough competition to ensure that deregulation would help consumers.”

But there are firms that already exist in Sioux City who could provide local phone service:

“A Qwest spokeswoman, Kara Rovere, said she's disappointed with the board's decision about Sioux City, but pleased with the ruling on the other markets."There are, I believe, 18 companies competing with us to provide service in (Sioux City). We believe it's very competitive," she said.”

Here’s a retort from a “consumer advocate”:

“John Perkins, the state government's consumer advocate, said the case made by big companies like Qwest is flawed because nearly all of the other service providers are much smaller and serve a niche clientele."If deregulation occurs in a market where there is truly not competition, then the incumbent local exchange carrier, whether it's Qwest, Iowa Telecom or Frontier, (has the ability) to raise their basic phone rates to whatever they want (emphasis added) and you the customer have nowhere to go," he said.”

The “consumer advocate” admits that there are firms that compete with Qwest in Sioux City. How hard can it be for these firms to provide service to customers who want it?

This “consumer advocate” needs a lesson in the principles of market power. I offer these two to him for no charge:

1. Firms with market power cannot charge whatever they want because consumer demand constrains these firms. A firm with market power can charge a higher price than a competitive firm, but it can’t charge whatever it wants. I would hope a consumer advocate would understand something about consumer demand.

2. When a firm charges a price that allows it to make economic profits (a return over and above the opportunity cost of the resources owned by the firm), it opens the door to competition from other companies, companies that the advocate admits exists in the Sioux City market. Customers may have nowhere to turn in the short run, but over time, they do have places to turn. Since these businesses already exist, my bet is the short run is indeed a short period of time. These businesses may be small, but they can become big if they are run well enough and keep costs low.

Lastly, the board wouldn’t deregulate Sioux City, but it saw fit to deregulate local phone service in Whiting, Ia. Whiting? WHITING??? Whiting is a town 30 miles south of Sioux City about 3 miles off of I-29. Whiting has fewer than 1,000 people in it. It might have a gas station, but I don’t remember (it’s not one of the places I often stopped when traveling down the interstate. Onawa is just a few miles down the road).


Tuesday, November 23, 2004

On the Basketbrawl Game - Signals to Fans

Commissioner David Stern has reacted harshly, and justifiably so, in handing down penalties in regards to the basketbrawl game between the Pacers and the Pistons (maybe we should call them the Pistoffs instead!). So far, no charges have been filed against any fans although the fan who allegedly threw the cup that landed on Artest as he lay on the scorer’s table has been identified. See here.

The punishment handed down on the players sends a signal to the players that they should think twice, maybe even thrice, before going after unruly fans. Of course this will not eliminate players going into the stands, but it should limit this possibility. The players’ punishment sends a signal to fans that the likelihood of players coming into the stands will be diminished. This has its ups and downs.

It remains to see how this will play out, but suppose that the authorities go relatively easy on the fans found to be involved in the incident. An easy punishment handed down on the fans sends a signal to some fans that if a fan mercilessly heckles a player during a game from the stands, the fan will not be punished too harshly by the law if the heckling escalates into something worse. Knowing this and knowing that players are unlikely to come after the unruly fans, the unruly behavior that was one of the flash points of the brawl is likely to intensify.


Kidney Donation at my University

The President of my university, Minnesota State University, is being prepped (as I type this) to have a kidney transplant. An employee of the university has donated one of her kidneys to President Richard Davenport. I wish him a speedy recovery and I wish the donor a speedy recovery herself.

It's too bad that we have to rely on donors to supply the organs needed for transplant. Altruism only goes so far.


Roll Tide!

George Will has this column about the culture of college football, specifically the Roll Tide brand of football. He writes about people who miss their daughter’s wedding because she scheduled it on a game day. He writes about a person who risked being taken off of a heart transplant list just to go see Alabama play on the road.

My favorite line is the one about the externalities of sport contests:

“But in every region, sport can produce a collective mind, or sometimes a collective setting aside of mind.”

So, is the commonality associated with sports an external benefit or cost?


Sunday, November 21, 2004

Why is MU Football So Mediocre?

Another year, another disappointing season for MU football - I can’t say I’m not disappointed, because I am. But I can’t say that I am upset because of the poor on-field performance of the teams I root for. It’s been especially bad since last October, the time since the Cubs took a 3-1 lead on the Marlins, only to have it all slip away. I’ve gotten too used to rooting for losers, I guess.

The Missouri Tigers gets it handed to them by Kansas 31-14, the second year in a row that the Tigers have lost to rival KU in grand fashion. This loss makes it 5 losses in a row overall. The Tigers, at 4 and 6, will not win the Big XII North. They will not go to any bowl. They will not win at least 8 games.

Why does Mizzou consistently perform poorly on the football field, especially considering they often have 50-55K at the games (they averaged over 55,000 in 2003). Now this isn’t great compared to the NU’s, OU’s, and Texas’s of the college football world, but it still isn’t too bad for a program with 3 winning seasons since 1983. While attendance is important, the revenues and costs generated by the football program are even more important.

Here is some athletic department data for teams playing in the Big XII north that I got from the Chronicle of Higher Education for the 2002-2003 academic year. It's the most-recent data available. It relates a telling story.

Missouri ranked next-to last in revenue generated by the football team. I don't have ticket price data for that year, but Mizzou ranks somewhere in the middle of the pack of the Big XII North teams in ticket prices this year... maybe a little below the middle.

MU ranked dead last, by almost $2 million, in operating expenses. It was also dead-and-buried last in proportion of total expenses spent on football but it ranked second, by almost $3 million compared to the third-place team, on total operating expenditures. A lot of people went to the games, but the school ididn't capture much money off of the football team and it spent less on the program than the other teams in its division.

Might Title IX restrictions have something to do with it? The following table makes me doubt this as a legitimate reason:

Missouri ranked last in men’s athletic program operating expenditures and next-to last in women’s athletic program operating expenditures, but it ranked second in operating expenditures on non-athletic-program expenditures.

One more table:

They also ranked next-to-last in recruiting expenditures for men’s programs and third to last in women’s recruiting expenditures.

All this begs the question – what were they spending their money on at Mizzou?