Market Power

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

Saturday, April 09, 2005

Caveat Emptor

I took my mountain bike, the Stumpjumper, to the bike shop today. It's rear wheel had a slight wobble that caused the rim to rub slightly against a brake shoe. The manager saw immediately that the wheel needed to be trued.

To true the wheel, he placed it in a truing stand. He spun the wheel and whenever it rubbed against the forceps on the truing stand, he either tightened or loosened a spoke to draw the rim away from the forceps. 5" later, I had true wheels.

He said a friend of his at some other bike shop placed a truing stand near his cash register with spoke wrenches draped all over it. Customers saw how to use the wrenches, and bought bunches of them. Not only did his sales of wrenches take off, but his truing business also went off becuase, inevitably, the customers would end up screwing the wheels up worse than before and would bring them back in to be trued.

Caveat emptor.


It's a Soda, Dadgummit

I grew up in Sioux City, Ia. At age 24, after graduating from Morningside College, I moved to Omaha, Ne to pursue my Masters. 4 years later, I floated further down the Missouri River to Columbia, Mo. to pursue my PhD. I now live in Mankato, Mn. In Sioux City, Omaha, and Mankato, soft drinks are referred to as "pop." But, since high school, I've referred to soft drinks as "soda". I've never liked the sound of the word "pop" and calling 7-up, Welch's grape soda, and similar soft drinks "Coke" is silly.

What are soft drinks referred to in your area? Hat Tip to Marginal Revolution.


Friday, April 08, 2005

Deep Doo Doo

Lawrence Summers is in deep shit at Harvard. He's not the only Harvard economist up to his eyeballs in poo. From the Chronicle of Higher Education (paid subscription required):

Martin L. Weitzman has a Ph.D. in economics, tenure at Harvard University, and an endowed chair, but what he really wanted was a truckload of free manure.

A police officer in Rockport, Mass., said on Wednesday that Mr. Weitzman was arrested and charged with trespassing, larceny under $250, and malicious destruction of property for attempting to steal manure last Friday from a horse farm in Rockport, 30 miles northeast of Boston.

According to the Associated Press, Phillip Casey, the stable manager at the farm of Charles Lane, found the economist on the property on Friday and blocked the professor's pickup truck before telephoning the police.

I have one question. Why would Weitzman go out and find his own shit? Isn't that what graduate assistants are for - going out and finding shit so the faculty member can work with the shit and find other shit for the grad assistant to go out and get?


How to Kill a Conversation in One Easy Lesson

Several months ago, I went to a dinner gathering with my wife. I talked to some of the guests, one of whom was a public school teacher. She asked what I did for a living and I told her that I taught at the local university. She really perked up at that, thinking she had found a kindred spirit.

Then she asked me what I taught. I told her "Economics."

I might as well have told her that I bullied elementary schoolchildren, defecated in public just for fun, and kicked puppies. The look on her face was very similar to that on my late father-in-law's face when I told him I was going to marry his daughter - a look that said "oh $h!t."

Yup. If you want to kill a conversation, tell people you are an economist. What's that, you say? You don't like your blind date? Tell him/her/it that you are an economist. As John Chilton says, "Economics is Potentially Hazardous to Your Social Acceptability."


The Move

The move to the new Market Power Blog is just about complete. Last night I spent time finding my way around Typepad and learned how to manually alter link lists. So I transferred the MOB roll over there, I added a sitemeter, and I added some syndication links (feedburner, xml, rss, myahoo, etc.). I any of you are using syndication links to get the blog, you can point them there now.

I still have a little work to do over there but the lion's share is complete. 11 days from now, this site will simply be for archives and the new site will be the only site that will be updated.


On Tenure

I am an assistant professor of economics and am, therefore, untenured. I go up for tenure after next year. Stephen Karlson at Cold Spring Shops has these thoughts on the tenure system.

Getting the chance at tenure is one of the benefits of the job. Generally speaking, assistant professors are willing to take a lower rate of pay to have the chance at tenure. If tenure were abolished, many would likely move out of academia if they were not compensated with a higher salary. I imagine this is especially true of professors from disciplines that are well-represented in the private sector (economics, finance, engineering, chemistry, medicine, etc.)

But the chance at tenure is not the only reason to work in academia. During the school year, I often do school-related work 7 days during the week. But other than my teaching schedule and my office hours, my work schedule is very flexible.

I also teach 8 months a year and have my summers off from teaching - if I so choose. I have the opportunity to teach summer school, but at this point in my career, I prefer to take the summer off to concentrate on my research. I have about 25 years ahead of me in my career. Research is something that doesn't pay off much in the short run, but, instead, generates long-term benefits. So I view today's research as an investment in my future.

I also teach a 4-4 load which gives me relatively little time to start up new research projects during the semester.


Thursday, April 07, 2005

Smackdown, Russ Roberts Style!

Russ Roberts had his ire up today at Cafe Hayek. Looks like the Giant grocery store chain and the union(s) that represent some of its worker are trying everything they can to keep the more-efficient Wal-Mart from setting up shop in Maryland.

It's hard to run a grocery store especially when others do it better than you do. So what's an ailing chain to do? There's trying harder, but wouldn't it be nicer not to have to? It's so much easier to try and handicap your competitors—you know, threaten to break their knees with baseball bats, set fire to their stores, intimidate their customers. Alas, these techniques are illegal, so the safest strategy is get politicians to handicap your competitors. This seems to be the strategy being pursued by Giant Foods in Maryland.
Of course, since Wal-Mart is such a nasty business, some politicians are only so happy to oblige. But Professor Roberts lays it down nice and concisely:

C. James Lowthers, president of Local 400, said the debate "is about what's right for the country."
That's a comfort isn't it? Glad to know it's not about self-interest, Mr. Lowthers.

Ironically, if this bill passes it will hurt workers by lowering the demand for their services. It will hurt consumers who will end up paying higher prices for groceries. It will help Giant and its unions.

Maryland Senate President Thomas V. Mike Miller Jr. (D-Calvert) said lobbying on the issue from labor groups was "very light."

Oh, right. They don't really care. It's not that important. Nooooo.

"It's an issue that's been around for a while, and all of us recognize that Wal-Mart doesn't do right by its employees," Miller said.

Great insight, Senate President Miller. Thank you for insulting the employees who choose to work at Wal-Mart for reasons you cannot decipher. Thank you for making it harder to operate a business and hire employees in our state. Thank you for making people's lives harder by making food more expensive. And most of all, thank you for encouraging other businesses to turn to you rather than trying harder as a way of staying in business.



Faculty Duties

The Chronicle of Higher Education reports that in addition to teaching, research, and service, more and more schools are asking their faculty members to be fund raisers (paid subscription required):

The abundant interest in the activities of our former students goes beyond mere curiosity. It reflects the intensified campaign by public universities to cultivate a pool of potential donors. More than ever, faculty members are being recruited for the tasks of development, an endless process of wheedling that has come to consume every sector of the university.

At the University of Oklahoma, my employer, the proportion of the operating budget contributed by the state has declined from 35 percent 10 years ago to about 20 percent this year. During that same time, student tuition has increased dramatically, but not enough to cover the loss in public revenue. ...

State-supported universities like mine are in a bind. While a smaller and smaller proportion of our expenditures are financed by public money, we are simultaneously prohibited from raising tuition beyond certain thresholds set by legislators. To support disciplines where large government grants for research are uncommon, we must rely increasingly on the generosity of alumni donors.

This raises several questions. Which faculty should raise funds and how much time should be devoted to fund raising? Should all faculty be involved or should this activity be delegated to one or two professors? If so, how should they be compensated (bonuses, release time)?

I visited a university awhile back where the chairman of the economics department taught the only upper-level class that every economics major was required to take - econometrics. He wanted to have every major as his student and one of the reasons was to improve his rapport with the alumni-to be. Not coincidentally, he is also the chief fundraiser for the department.


Wednesday, April 06, 2005

Google Maps

Google maps has a link to satellite pictures of various locations. Here's an example of the detail provided for some locations. Go to Google maps, find the location you want to view on the map and click "Satellite."

Way cool!


Note to Self - Stop Thinking Like an Economist

This morning's Wall Street Journal had a letter to the editor from Luis Suarez-Villa, a professor of social ecology at the University of California - Irvine:

Harvard President Larry Summers is now discovering what many economists find out to their dismay when they venture out of the old-boy network that is American economics. Musings that are considered "normal" among economists tend to be regarded as insensitive or even prejudiced in many other disciplines. At the root of his remarks is the fact that Mr. Summers's thinking is grounded in a discipline that has little sense of fairness and moral obligation, where discriminatory situations are often accepted as the result of Darwinian mechanisms that should be left untouched.
It's not that we have little sense of fairness. It's that we realize that we aren't the moral stewards of the world - and we realize that one person's fairness is another person's foul. Why is it fair to raise the minimum wage and thereby throw people out of work? Why is it fair to attack Sam's Club for selling gasoline at a low price just to maintain the profit margins of small gas-station owners? We also realize that by trying to codify notions of fairness, more often than not, inefficiencies creep in that end up doing more harm than good.

Mr. Summers could have blamed his training in economics for his insensitive remarks, based on the discipline's inability to understand fairness and shed its pseudo-scientific ways.
What does it mean to be pseudo-scientific? By using the scientific method, people observe a phenomenon, develop a hypothesis about what was observed, and gather data - experimental or not - to test the hypothesis. It is not necessary for each and every person who examines a subject to utilize each and every step of the scientific method. One researcher may gather data and realize that there is some systematic relationship between two things. Another researcher, may develop a theoretical explanation about what was observed, and another researcher may gather a different set of data to see if the systematic relationship is at play there. What matters in using the scientific method is that all three steps, observation, hypothesis generating, and hypothesis testing, get used. Economics utilizes every single bit of the scientific method, so I don't know what is meant by "pseudo scientific" (other than being an obvious put-down).

Economists are scientists in that we seek explanations for things that we observe and we seek predictions based on our explanations. For example, suppose we observe that a woman is earning less than a man. Economists want to know why. We don't start off by immediately saying "IT MUST BE DISCRIMINATION!" Instead, we try to reason through the various things that could affect what we observe to learn to what extent discrimination and non-discriminatory voluntary choices (among other things) affect what we observe. That way, if policies are necessary to correct something, they can be more efficiently targeted.

Aristotle said "The law is reason without passion." That may be an accurate way to describe the law, but it is just as accurate, if not more-so, to describe economics in the same fashion.


Sports Subsidies

There are three types of explicit subsidies professional sports teams get.

1. Transfer Payments - a payment from the government to someone in which the government doesn't get anything in return.

2. Infrastructure subsidy - a subsidy to improve things like roads, pipe, highway entrance and exit ramps, street lighting, etc. around a stadium.

3. Construction subsidy - a subsidy to build the stadium.

The owners of the Boston Red Sox have committed to stay in Fenway park. They have received very little public support for construction of a new stadium - even in the wake of their World Series Championship - and are now looking for an infrastructure subsidy.

The announcement marks the beginining of an effort to revitalize the neighborhood that is later expected to include a push for public financing for improved streets and sidewalks, a new MBTA train station at Yawkey Way, and one or more garages, say Red Sox executives. The team also wants to have a say in development decisions around the park that could affect the Fenway experience, the executives said yesterday.
I blogged here about a talk I gave recently about why rational teams seek public construction subsidies even though the receipt of such may put a drag on the appreciation of their franchise values. Basically, the idea is that the present discounted marginal franchise value - the difference between the franchise value of a team playing in its own stadium and the franchise value of a team playing in a public stadium - does not come close to fully covering the cost of building the stadium.

Improving the area around a park would, I imagine, provide a boost to franchise values as well, especially to teams that own their own stadium, because the infrastructure subsidy would boost the value of nearby property. But the big difference is that with construction subsidies, the public can lay a claim on the stadium. With the infrastructure subsidy, it is likely that no such claim on the stadium would exist.


Tuesday, April 05, 2005

The Average Economist

According to the November 2003 National, State, and Metropolitan Area Occupational Employment and wage estimates produced by the US Bureau of Labor Statistics, the average economist earned $78,370 annually. The median economist earned $70,520. The average government economist earned $79,424. The average economist working in scientific research and development earned $102,320. The average economist working in management and technical consulting services earned $98,250. These figures do not include academic economists, a different occupational group.

The average post-secondary economics teacher earned $72,300. The median economics teacher earned $66,300. The average econ teacher at a junior college earned $52,160 while the average econ teacher at a college/university earned $76,780. In Minnesota, the average economics teacher earns over $85,000 per year. According to the BLS website, all annual salaries reflect a 12-month full time schedule, even for academic economists.

*** Addendum: here is a link I just ran across for a salary survey from AACSB.


Price Gouging

In Principles of Micro, my students have just finished covering material related to the efficiency of competitive markets. We examined why laws meant to keep prices artificially low bring inefficiencies into the market place and ensure that shortages will crop up. One can make a similar argument about artificially high prices. I suggested that during this summer's hurricane season, they should look for claims of price gouging after hurricanes come on shore and wonder what good laws against price gouging do.

For those who are impatient, we already have claims of price gouging:

With Pope John Paul II's funeral expected to draw up to 2 million people, at least one consumer group is accusing cafes, restaurants, grocery stores and hotels near St. Peter's Square of boosting prices to gouge tourists and pilgrims.
Keep in mind that this is a tremendously large and sudden change in demand:
In normal times, this would be a lull in tourism, after the rush of Easter and before the summer holidays. But consumer groups estimated Monday that local businesses would earn at least $122.5 million in about two weeks
Consider the market for restaurant meals. In a market system, what happens when there is tremendous and sudden increase in the demand for restaurant meals? Prices rise. Why do prices rise? Because an increase in the demand for restaurant meals increases the demand for the resources that produce them and these resources need to be compensated. In order to serve the influx of customers, restaurants will have to hire additional staff, food, cookware, chairs, tableware, etc. All these resources have alternative uses and to give these resources an incentive to temporarily relocate, restaurants have to give them an incentive to do so.

How do we ensure that adequate resources are there to meet the sudden, unplanned, and tremendous increase in demand?

We could take the bureaucratic route. We could schedule legislative hearings to determine whether or not the extra resources were needed and we could determine what the fair price for said resources would be. How long might this take? What are the opportunity costs of those in the deliberative process? Will the 2,000,000 people be adequately, quickly, and efficiently fed? How can we ensure that the government officials won't behave opportunistically?

A better way is to provide an incentive, via the price system, for people who own the necessary resources to divert them to where they are most wanted. Rising prices send a signal that more resources are needed in a market, resources that have alternative uses and, thus, opportunity costs. That way, we make sure that those who want to eat restaurant meals etc. can get them and get them efficiently.

But what about those renegade restaurants who are out there to screw the customer over? Aren't there going to be places that try to do this? Possibly. How do we ensure that the visitors don't get screwed?

Competition will help limit this. What happens to places that raise their prices "too much?" Restaurants that do so will have some potential customers "diverted" to other areas. Rome is a city of 3,000,000 and visitors have many choices in restaurants, meaning individual restaurants have little market power. I also imagine that these renegade restaurants will also be more likely to treat their customers poorly in other ways. When a business tries to screw over its customers (whether it comes through poor service or prices that don't match the quality that customers expect), markets tend to deal with them harshly.


Monday, April 04, 2005

Labor Market Choices

Here's the abstract from this new working paper by June O'neill and Dave O'neill at the NBER:

We examine the extent to which non-discriminatory factors can explain observed wage gaps between racial and ethnic minorities and whites, and between women and men. In general we find that differences in productivity-related factors account for most of the between group wage differences in the year 2000. Determinants of wage gaps differ by group. Differences in schooling and in skills developed in the home and in school, as measured by test scores, are of central importance in explaining black/white and Hispanic/white wage gaps among both women and men. Immigrant assimilation is an additional factor for Asians and workers from Central and South America. The sources of the gender gap are quite different, however. Gender differences in schooling and cognitive skills as measured by the AFQT are quite small and explain little of the pay gap. Instead the gender gap largely stems from choices made by women and men concerning the amount of time and energy devoted to a career, as reflected in years of work experience, utilization of part-time work, and other workplace and job characteristics.


Surgical Implants for Deaf Children

The Wall Street Journal had this article last week on deaf children who, with surgical implants, can hear almost as well as if they weren't deaf.

So-called cochlear implants -- electronic devices surgically placed in the bone behind the ear -- have been around for two decades. But it was only five years ago that the U.S. Food and Drug Administration approved the devices for use in children as young as 12 months. Now a new generation of children is entering deaf schools with the hope that they may someday hear and speak almost as naturally as those without hearing problems.
What is at issue is not these children's ability to hear, but the maintenance of a "deaf culture".
Some steeped in deaf culture don't see themselves as handicapped and view implants as an attempt to "fix" something that isn't broken. They especially oppose hearing parents deciding to get implants for their deaf children, believing kids should make the decision themselves when they get older. "This is a major intervention, and the ethics of operating on a healthy child can be questioned," says Harlan Lane, a psychologist at Northeastern University in Boston who has written many books about the deaf community.
But, according to the article, the implants work best when given to young children. I suppose this is the similar to how children who learn a foreign language when young do better with that foreign language as time goes on.

I can't help but think there is something else going on - the attempt to keep a livelihood that one has spent their entire adult life in and, as a result, know of no other way to make a living. The cochlear implants could eliminate the need for teachers and administrators in schools for the deaf. But the proponents talk about deaf culture as if we are talking about Inuit culture or Ojibwe culture. Perhaps, to them, it is a culture. But what about the kids? Given a choice, which would they prefer? Is it right for someone to deny someone the right to hear just so others can maintain a culture?


Sunday, April 03, 2005

Is it Cold Outside?

Or are you simply frigid?

Thanks to JC for the link.


Those Wacky Canucks!

I had this post awhile back on things not to have on your vanity plate. John Palmer describes his vanity license plate here.