Market Power

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

Saturday, March 05, 2005

What's your Opportunity Cost of Robbery?

Many years ago, I used to work for Walgreens at the mall in Sioux City, Ia. After work one Friday evening, I walked with my assistant manager down the hall of the mall to put the day's revenue into the bank. Since it was late on Friday, my manager had to put the money in a big metal deposit box. Managers of other stores had done the same thing, and the box had envelopes sticking out of the drawer. My manager said "Look at all that cash. We could take some of it and skip town, but that would be stupid. We'd just get caught and would be in big trouble." In other words, the marginal benefits of stealing the cash were far outweighed by the expected marginal costs.

Apparently Larry Ned, formerly of the Arizona Cardinals, didn't think as my manager did.

Thanks to the Eclectic Econoclast for the pointer.



I looked at my extreme tracking and found several MOB members who have linked to me. Thanks to Bogus Gold and MAWB Squad. I shall be updating my blog links to include MOB members.


Economies of Scale and the Law of Supply

Don Boudreaux has this nice post on the law of supply. Here is a quote:

Teaching the law of supply is a tad bit trickier because of the widespread knowledge of economies of scale. Each semester, several thoughtful students always ask "Doesnt producing more of something reduce the cost per unit and, hence, enable producers to sell it at a lower price? So dont lower prices, rather than higher prices, correspond to higher quantities supplied? I dont understand why price must rise in order to inspire a firm to offer greater quantities for sale." Good point.

I respond first by asking the students to wait a few lectures until we explore the law of diminishing returns; they
ll see then that no firm can expand output indefinitely without eventually seeing its costs of production per-unit rise.
Another thing at play is that the supply curve, technically, refers to a competitive market (although many of its principles are widely applicable to other market structures as well). In a competitive market, each firm is such a miniscule portion of overall market supply, that diminishing returns set in relatively early on for each firm. In other market structures, such as monopoly, firms have economies of scale, and firms can keep competition out because the economies of scale give them a pricing advantage, and thus, market power - at least in the short run.

Don links to an excellent article on oil drilling in urban neighborhoods in Texas. With oil at over $50 a barrel, drillers are going after oil in urban areas.

"This is one of the oddities of $50 oil," Ms. Sage said. "This type of thing doesn't happen with $20 oil."

Some cities, of course, have long coexisted with oil drilling in their midst - the La Brea Tar Pits in Los Angeles, for instance. But most of those fields were explored decades ago and some long forgotten. The emergence of urban oil exploration in Houston illustrates the lengths to which some companies are going in their search for oil in areas long written off.

The low-hanging fruit principle states that rational firms produce the cheapest units first. I explain to my students that, according to the law of supply (and the low-hanging fruit principle), the reason that businesses stop supplying additional units at the market price is because one more unit costs more that it generates in revenue. This principle is alive and well today in the oil industry.

Will we run out of oil? Not if market forces are allowed to work.


Wednesday, March 02, 2005

Is This Simple Enough?

In this post below, I made this statement:

I'm a beer snob, not a wine connoisseur. But I do like a bottle now and then (not in one sitting - generally!) when it comes to spending $40 on a bottle of wine. I know what I'm getting when I buy a Cab, or a Merlot, or a Shiraz. But I find the labels of many french wines to be difficult to read, and being a casual wine drinker, I usually buy what I can understand.
OK, Chet, how's this for clarity (seen at the local liquor store as I was shopping for some snobby IPA)?


You've Got Mail, Dr.

From the New York Times (membership required):

In a move to improve efficiency and control costs, health plans and medical groups around the country are now beginning to pay doctors to reply by e-mail, just as they pay for office visits. While some computer-literate doctors have been using e-mail to communicate informally with patients for years, most have never been paid for that service.


Blue Shield of California pays his doctor $25 for each online exchange, the same as it pays for an office visit. Some insurers pay a bit less for e-mailing, and patients in some health plans are charged a $5 or $10 co-payment that is billed to their credit card and relayed to the doctor.

For doctors, the convenience of online exchanges can be considerable. They say they can offer advice about postsurgical care, diet, changing a medication and other topics that can be handled safely and promptly without an office visit or a frustrating round of telephone tag. And surveys have shown that e-mail, by reducing the number of daily office visits, gives physicians more time to spend with patients who need to be seen face to face.

For patients, e-mail allows them to send their medical questions from home in the evening, without missing work and spending time in a doctor's waiting room. In fact, many say exchanges in the more relaxed, conversational realm of e-mail make them feel closer to their doctors.

The patients can also use the e-mail connections, which they reach through secure Web sites, to get X-ray and test results and request prescription renewals. Doctors are not paid for these services, except in time saved in the office.

This shift toward online doctor-patient communication is important for another reason. Physicians and health care technology specialists say they believe that it could help spur the changeover to electronic health care information systems, which government officials and industry leaders say is needed to reduce medical errors and promote better care. Doctors at the clinics of the University of California, Davis, grew accustomed to using e-mail for clinical purposes before the clinics introduced electronic medical records, said Dr. Eric Liederman, medical director of clinical information systems at Davis. The messaging "gave them some comfort and facility with using the computer," he said.

How do medical liability concerns work into this? Emails can be very easy to misunderstand.


Iowa State = Harvard?

The Econoclast has this little blurb about a humor piece regarding Larry Summers and a new program at Harvard. Sorta reminds me of the Consumer and Family Economics Department down at my alma mater.


The Wines of France

"Who's killing the great wines of France?" asks the headline of this LA Times article.

Answer (according to this Wall Street Journal article (subscription req'd) and according to the LA Times article): consumer demand. Consumers are not buying the French wines because (in no particular order) 1. the falling value of the dollar makes these wines more expensive relative to domestic wines; 2. California, New Zealand, Australia, Spain, and Italy (among other countries) are providing a lot of good competition 3. the labels of the French wines are very complex.

I'm a beer snob, not a wine connoisseur. But I do like a bottle now and then (not in one sitting - generally!) when it comes to spending $40 on a bottle of wine. I know what I'm getting when I buy a Cab, or a Merlot, or a Shiraz. But I find the labels of many french wines to be difficult to read, and being a casual wine drinker, I usually buy what I can understand.

The LA Times article has this quip:

But the real problem is there's too much French wine. Hoping for a quick fix in the region that appears to be hardest hit, the government is paying grape growers in Bordeaux to rip up marginal vineyards and turn surplus wine into industrial alcohol. So far, however, only 475 acres of a targeted 25,000 acres of vineyards have been plowed under. The government plans to distill a whopping 250 million liters of wine from the abundant 2004 vintage into alcohol, 10 times as much wine as would be distilled in a typical year; most of it is labeled Appellation d'Origine Contrôlée (AOC). Still, it won't be enough to sop up all of the surplus.
It's an odd quip because most of the rest of the article focuses on the demand challenges faced by the French winemakers. In any cases, market forces can be very unforgiving. That's why they work so well.


Tuesday, March 01, 2005


From an email I got this evening:

Tired of speeding tickets?  Want to open up spaces between you and
the cars around you?

Step 1. Tie these balloons to your car
Step 2. Drive VERY FAST
Step 3. Watch people freak out.
Step 4. Tell the nice officer you thought they were real.

Thanks to Mike for the email.


Bono for World Bank President?

That's what an editorial at the LA Times suggests. Here's more on the subject at Adam Smithee.


Panic in the Athletic Departments?

I asked a friend who works in a collegiate athletic department what the general feeling was among the employees regarding the new NCAA guidlines regarding the academic performance of student-athletes. His response was one word: "panic."

From the Chronicle of Higher Education (paid subscription required):

In the NCAA's first "real time" assessment of athletes' academic success, nearly 1,200 teams out of the 5,721 in all Division I sports had an Academic Progress Rate of less than 925, which means that the team is on track to graduate less than half its athletes. The rate, calculated for the 2003-4 academic year, measures how many athletes are making adequate progress toward their degrees.
The Big 12 did poorly in football. The Big 10 did the best among D1 football programs. Here's a quote from a San Jose Mercury News story:
The Big 12 ranked eighth among the 11 conferences that compete in Division I-A football in the percentage of teams that cleared the academic bars set in those three sports. It had 19 of 34 teams, or 56 percent, make the grade. The top performer was the Big Ten, with 30 of 32 teams achieving passing scores.
According to the first data releases on how schools are performing, it's safe to say "panic" is a pretty common feeling in athletic departments these days.


Innate Differences

Lawrence Summers, president of Harvard, started a huge uproar by stating that there might be innate differences between men and women that lead women to be "underrepresented" in math and science faculties. I wrote here about some of the problems associated with the uproar.

Was Lawrence Summers wrong? Here is a statement about an online discussion about this very topic from my daily email from The Chronicle of Higher Education:

Harvard's president, Lawrence H. Summers, recently ignited a firestorm of protests by saying that "intrinsic" differences between the sexes may explain why so few women rise in math and science. But a growing body of research suggests that genetic factors predispose women to avoid those fields. How should colleges respond? And do some academics owe Mr. Summers an apology?
Perhaps those researchers who have been producing the "growing body" need some sensitivity training (he says sarcastically).


Monday, February 28, 2005

Missouri Tiger Football, A History in Pictures

A fella who goes by the handle of "Crazy Joe Devola" on Tigerboard has assembled this slide show containing dozens of photos from Tiger Football history. Very nice work.


Drugs are Good, M'kay. But Profits are Bad

From a Washington Post survey on pharmaceuticals and the companies who develop and make them:

By an overwhelming majority, Americans believe prescription drugs significantly improve their health and quality of life, but almost as many say the companies that make them put their profits ahead of the well-being of consumers, according to a new poll released yesterday.

The survey by the Kaiser Family Foundation found that 78 percent of adults say prescription drugs make a "big difference" in people's lives, and 91 percent believe drug companies contribute significantly to society by researching and developing new drugs.

But 70 percent think the pharmaceutical companies that produce them are more concerned "about making profits" than developing new drugs, according to the survey.

How did those shoes get on your feet (assuming you are wearing shoes at this time)? Did those shoes get on your feet because some benevolent government official didn't want your tootsies to get too cold on this last day of February, thereby issuing you a pair of shoes? Or did some shoe company, employing people you probably will never meet, produce them for you? How did the shoes get to your local store? Did some trucking company or some air freight company ship them to a store near you or did some other benevolent government official, knowing full well that you'd need to have shoes this morning, direct the shoes to be sent to the store? Why did the store sell you these shoes? Did that store provide those shoes for you because it wanted to be happy? The answer is no. What was that thing that each of the companies who handled your shoes responding to? That "thing" was thee ability to make profits - and it is the ability to make profits that allowed you to obtain the money necessary to buy those shoes.

Of course the drug companies are seeking profits. That's why they are spending so much to develop drugs. If we limit their profit-making ability, we blunt their incentives to do research and develoment. The more we blunt their ability to seek profits, the less-satisfied people will be with the medicines they acquire.


Sunday, February 27, 2005

Non-Price Rationing

John Palmer at the Eclectic Econoclast has this post on subsidized medicine and this post on socialized medicine (medicine "subsidized" by Balco). What happens when the price of a service gets lowered below its market-clearing level (usually to make it more affordable for those with low incomes)? Many things develop, one of them being a waiting list.