Once again, we are learning about a case in which one party knows more information in a transaction. Private information is only available to one party in a transaction, which gives the party with the information a huge advantage. This private information leads to asymmetrical information, a concept we learned earlier on in the semester.
The presence of asymmetrical information leads to two things: adverse selection and moral hazard. Adverse selection is the tendency for people to enter into agreements where their private information gives them an advantage. Moral hazard is the tendency for people to act in ways that impose costs on the party without access to the private information. For example, if you pay an insurance company to insure you against theft, then leave your doors unlocked, without the insurance company having knowledge of this.
We seem to focus a lot on the used car market this semester. It is the prime example of a transaction in which one party knows more than another. In the context of used cars, this results in what is known as the lemon problem. Since it is not possible to distinguish between reliable cars and lemons, there are too many lemons and too few reliable cars. We have no way to tell which is which, which gives the seller no real incentive be truthful with us. It’s a 50:50, so a consumer will try to get a lower price due to the risk of ending up with a lemon, but sellers won’t want to see a good car for that low price. The adverse selection here is the greater incentive to offer a lemon. The moral hazard would be that lemon owners have little incentive to care for their cars because we can’t tell either way.
I, like so many of us, have been through the torture of looking for a used car. It’s true, there are definitely more lemons out there and a lot of people trying to rip you off. The best way to avoid this problem is by making sure the car has a warranty, which isn’t always a fix all since sometimes they won’t hold true to their word. I believe Carfax helps people looking for used cars as well. Nevertheless, the situation can be a catch 22 in a lot of ways since we want a good deal, but if the dealer takes that really low offer, does that mean the car has a greater chance of being a complete lemon? I guess it’s just a hit or miss when it comes to getting a lemon or a reliable car. That's why you should always ask a trusted family member i they are looking to get rid of one their cars before hand!
Happy last blog week!
Sunday, May 2, 2010
Sunday, April 25, 2010
Trusting Antitrust Laws
After extensively learning about monopolies and oligopolies and how they operate, antitrust laws finally came into discussion this week. They are laws that regulate oligopolies and prevent them from becoming monopolies.
Some of the things antitrust laws look at are conspiring to restrict competition, price discrimination, tying arrangements, requirements contracts, territorial confinement, and exclusive dealings. The biggest issues in antitrust are resale price maintenance, which is an agreement between the manufacturer and distributor on the resale price (the temptation will always be to set the price at the monopoly level) and predatory pricing, setting a low price to drive competitors out of business with the intent to establish a future monopoly. They also look at tying arrangements, which are agreements to sell one product only if the buyer agrees to buy another, different product.
This leads me to the example we got in class about the United States v. Microsoft. In this case, the US argued that there was monopoly power in the PC operating system, meaning there was no alternative to Windows. They claimed tying arrangement were used to get a monopoly on web browsers. If you bought Windows, you got Internet Explorer. The government said this and other anticompetitive practices were used. On the flip side, Microsoft claimed that the operating system and web browser were actually a single product. Since Microsoft lost, we now have more browser options and Apple has definitely risen up as well in the world of computers.
Since Microsoft’s actions were put under scrutiny, I found myself wondering the same thing another classmate brought up, how does Walmart get away with it? Our teacher made it clear Walmart and other stores, in contradiction to our textbook’s information, actually do practice predatory pricing and definitely engage in anticompetitive practices, establishing themselves as clear monopolies on a local scale. So this means they slide under the radar? I did some research and read an article titled “Is Walmart a Monopoly?” by Robert Feinman. He dubs Walmart, along with Major League Baseball, a “monopsony.” To him, this means it becomes the single buyer in a markert and an effective monopoly on local levels. He claims that instead of overcharging customers, the produce at economic distortions by under paying suppliers.
While the term “monopsony” is a strange new unofficial concept to me, it did make me wonder if we need to perhaps broaden the rules a little so that companies such as Walmart should not be able to thrive while they clearly show signs of anticompetitive behavior.
Some of the things antitrust laws look at are conspiring to restrict competition, price discrimination, tying arrangements, requirements contracts, territorial confinement, and exclusive dealings. The biggest issues in antitrust are resale price maintenance, which is an agreement between the manufacturer and distributor on the resale price (the temptation will always be to set the price at the monopoly level) and predatory pricing, setting a low price to drive competitors out of business with the intent to establish a future monopoly. They also look at tying arrangements, which are agreements to sell one product only if the buyer agrees to buy another, different product.
This leads me to the example we got in class about the United States v. Microsoft. In this case, the US argued that there was monopoly power in the PC operating system, meaning there was no alternative to Windows. They claimed tying arrangement were used to get a monopoly on web browsers. If you bought Windows, you got Internet Explorer. The government said this and other anticompetitive practices were used. On the flip side, Microsoft claimed that the operating system and web browser were actually a single product. Since Microsoft lost, we now have more browser options and Apple has definitely risen up as well in the world of computers.
Since Microsoft’s actions were put under scrutiny, I found myself wondering the same thing another classmate brought up, how does Walmart get away with it? Our teacher made it clear Walmart and other stores, in contradiction to our textbook’s information, actually do practice predatory pricing and definitely engage in anticompetitive practices, establishing themselves as clear monopolies on a local scale. So this means they slide under the radar? I did some research and read an article titled “Is Walmart a Monopoly?” by Robert Feinman. He dubs Walmart, along with Major League Baseball, a “monopsony.” To him, this means it becomes the single buyer in a markert and an effective monopoly on local levels. He claims that instead of overcharging customers, the produce at economic distortions by under paying suppliers.
While the term “monopsony” is a strange new unofficial concept to me, it did make me wonder if we need to perhaps broaden the rules a little so that companies such as Walmart should not be able to thrive while they clearly show signs of anticompetitive behavior.
Advertising: Does it really matter?
Commercial advertising. Everyone seems to make a huge deal about commercials and advertisements these days. We think we remember the good, interesting ones and I know people who watch the Super Bowl solely for the advertisements. So when I saw the slide that asked “Is all “innovation” innovative?” I was a little taken aback.
We learned that substitute gimmicks or packaging changes most of the time result in a deadweight loss. Also, with advertising, unless it creates demand where there wasn’t before, it’s a deadweight loss on a macroeconomic scale. This information surprised me at first, but as I thought about it more, it made sense. I have never really had more of a desire for a good after a package change and advertisements for goods I know I do not want don’t swing my decision. We were given an example of a graph which showed that in some cases, it makes sense for a firm to not advertise when compared to total cost.
On the other hand, we learned about signaling, when an informed person or firm taken an action to send a message to less informed people. Advertising can act as a signal of quality to consumers, regardless of the advertisement’s content. Now this did stun me. I always imagined teams and teams of people working on a single commercial, doing tests and surveys to see which one communicates and translates well with the desired consumer group. Is this all for nothing? Perhaps; because in our minds all advertisements send a signal that the maker is successful enough to advertise in the first place and that they have faith in their product. Brand names also stick out to us as a sign of consistency. I remember being a young child and getting so angry with my mom for buying me store brand foods, convinced that brand names were so much better, even then I was swayed by signaling.
It’s clear that advertising is a good choice most of the time, regardless of how good the ad is, we will likely remember it. I believe this information has helped me. Next time I see a terribly stupid commercial and think, “Why would they ever air that?” the joke will be on me as a consumer.
We learned that substitute gimmicks or packaging changes most of the time result in a deadweight loss. Also, with advertising, unless it creates demand where there wasn’t before, it’s a deadweight loss on a macroeconomic scale. This information surprised me at first, but as I thought about it more, it made sense. I have never really had more of a desire for a good after a package change and advertisements for goods I know I do not want don’t swing my decision. We were given an example of a graph which showed that in some cases, it makes sense for a firm to not advertise when compared to total cost.
On the other hand, we learned about signaling, when an informed person or firm taken an action to send a message to less informed people. Advertising can act as a signal of quality to consumers, regardless of the advertisement’s content. Now this did stun me. I always imagined teams and teams of people working on a single commercial, doing tests and surveys to see which one communicates and translates well with the desired consumer group. Is this all for nothing? Perhaps; because in our minds all advertisements send a signal that the maker is successful enough to advertise in the first place and that they have faith in their product. Brand names also stick out to us as a sign of consistency. I remember being a young child and getting so angry with my mom for buying me store brand foods, convinced that brand names were so much better, even then I was swayed by signaling.
It’s clear that advertising is a good choice most of the time, regardless of how good the ad is, we will likely remember it. I believe this information has helped me. Next time I see a terribly stupid commercial and think, “Why would they ever air that?” the joke will be on me as a consumer.
Sunday, April 11, 2010
Monopolies
Monopolies are defined as a market with a single supplier, yes it's more than just a game! This week, we learned about what needs to happen in order for a monopoly to arise, as well as prices under monopolies.
In order for a monopoly to arise, there must be no close substitutes and no barriers to entry. The absence of substitutes is a hard one to maintain, because it is often not permanent. New substitutes can arise due to technological changes or new products. It is a tricky situation to try to keep up with if you want to keep a monopoly going. As for the barriers to entry, these include natural, ownership, and legal. Natural boundaries are the least vulnerable to change. Natural barriers mean one firm can meet the entire market demand cheaper than two or more firms can. The second barrier is ownership, which means one firm controls all production and supply. The third is legal, which means the government restricts entry by using tools like patents, licenses, or copyrights.
Prices under monopolies vary as well. A single-price monopoly sells at the same price for everyone, while price-discrimination means different units are set at different prices not related to cost. Price discrimination is often not possible in a monopoly because what’s to stop low price people from reselling.
Monopolies are a tricky concept in this day and age because the government puts up many restrictions to prevent companies from monopolizing a market, seeing as how we love our competition here in America. I can think of the example stated in class, the Postal Service. This is our only method of sending actual letters, and even that has taken a beating with the internet and e-mail, etc. Also, I’ve noticed an awful lot of Publixs opening up in the Palm Harbor area. I live here and I just recently realized how quickly a Publix seems to be popping up on every corner and I believe we only have one Sweet Bay left in the entire area? It seems to me Publix may soon be the only option for grocery stores around here. Anyone agree/disagree?
In order for a monopoly to arise, there must be no close substitutes and no barriers to entry. The absence of substitutes is a hard one to maintain, because it is often not permanent. New substitutes can arise due to technological changes or new products. It is a tricky situation to try to keep up with if you want to keep a monopoly going. As for the barriers to entry, these include natural, ownership, and legal. Natural boundaries are the least vulnerable to change. Natural barriers mean one firm can meet the entire market demand cheaper than two or more firms can. The second barrier is ownership, which means one firm controls all production and supply. The third is legal, which means the government restricts entry by using tools like patents, licenses, or copyrights.
Prices under monopolies vary as well. A single-price monopoly sells at the same price for everyone, while price-discrimination means different units are set at different prices not related to cost. Price discrimination is often not possible in a monopoly because what’s to stop low price people from reselling.
Monopolies are a tricky concept in this day and age because the government puts up many restrictions to prevent companies from monopolizing a market, seeing as how we love our competition here in America. I can think of the example stated in class, the Postal Service. This is our only method of sending actual letters, and even that has taken a beating with the internet and e-mail, etc. Also, I’ve noticed an awful lot of Publixs opening up in the Palm Harbor area. I live here and I just recently realized how quickly a Publix seems to be popping up on every corner and I believe we only have one Sweet Bay left in the entire area? It seems to me Publix may soon be the only option for grocery stores around here. Anyone agree/disagree?
Thursday, April 1, 2010
Is any market perfectly competitive?
This week in class, we learned about the concept of perfect competition in the markets. In a world in which perfect competition exists, there would be many sellers, many buyers, identical goods, no barriers to entry or exit, perfectly symmetrical information, and no built in advantage of established firms over newcomers. Another idea is that “Firms all look the same to the buyer,” which is not enough because as consumers, we cannot see the barriers to entry/exit or asymmetrical information. In conclusion, the standards for a market having “perfect competition” are so high and slightly unrealistic that this idea has become mostly theoretical in the economic world.
However, I tried to rattle my brain for the most perfectly competitive market I could think of. I then thought of St. Maarten, a place I visited while taking a cruise last year. They had a huge lot filled with vendors and locals selling tons of goods to tourists. I wanted to buy something for my mom, so I began looking at pretty hand painted wind chimes. The lady of course lowered the price for me, and I bought it. As I continued walking, I saw the same exact “hand painted” wind chime at about 15 other tables.
I believe these street vendors had the closest thing to a perfectly competitive market I personally had ever seen. There were tons of tourists, buyers, and locals, the sellers. For the most part, all their goods were identical (I learned that the hard way). I can only imagine that the newcomers are not at a disadvantage because I could not tell who had been selling for 10 years or had just started that week, because all their tables virtually looked the same. The only issue was the “buyers and sellers enjoy perfect information” criteria; which as a buyer, I was not aware of any asymmetries going on around me.
In conclusion, no market is ever going to be perfectly competitive, which is why it is thought of as more of a theory or concept in today’s world. Yet, the street vendors of St. Maarten are a good example of a market somewhat close to having perfect competition.
However, I tried to rattle my brain for the most perfectly competitive market I could think of. I then thought of St. Maarten, a place I visited while taking a cruise last year. They had a huge lot filled with vendors and locals selling tons of goods to tourists. I wanted to buy something for my mom, so I began looking at pretty hand painted wind chimes. The lady of course lowered the price for me, and I bought it. As I continued walking, I saw the same exact “hand painted” wind chime at about 15 other tables.
I believe these street vendors had the closest thing to a perfectly competitive market I personally had ever seen. There were tons of tourists, buyers, and locals, the sellers. For the most part, all their goods were identical (I learned that the hard way). I can only imagine that the newcomers are not at a disadvantage because I could not tell who had been selling for 10 years or had just started that week, because all their tables virtually looked the same. The only issue was the “buyers and sellers enjoy perfect information” criteria; which as a buyer, I was not aware of any asymmetries going on around me.
In conclusion, no market is ever going to be perfectly competitive, which is why it is thought of as more of a theory or concept in today’s world. Yet, the street vendors of St. Maarten are a good example of a market somewhat close to having perfect competition.
Profit: the only goal of the firm
Firms/businesses would always like their consumers to believe that they are personally striving to help us and if we consume their products, it makes the world that much better. In class, we heard examples of “goals” such as, to focus on innovation and growth, to inspire and nurture the human spirit, and to spearhead the digital media revolution. Claims such as these can be heard daily in ads, in the newspapers, and on tv. Think about it. “Like a good neighbor, State Farm is there?” A huge insurance company really thinks that by using this slogan, we will compare them to one of our neighbors? But what is their REAL goal? Money; getting as much as they can from us and maximizing their profit.
But even the ideas of “profit” and what it costs to make a profit are debatable. Depending on who you ask, profit could have very different meanings. For example, accountants view total cost as expenses and depreciation, while economists view total cost as the sum of implicit and explicit costs or as opportunity cost. An explicit cost is a cost paid in money, but an implicit cost is an opportunity cost incurred by a firm when it uses a factor of production but does not make a direct payment. Even the concept of depreciation will vary depending on who you are talking to. Economic depreciation is considered the opportunity cost of the firm using the capital it owns. It is measured in the change in the market value of the capital. On the other hand, accounting depreciation is calculated using IRS rules. Basically, normal profit is the cost of not doing something else with your time, but there are even different types of profit such as economic profit or excess profit.
Why should all of this matter? I assume most of us enrolled in this class want to eventually earn a type of business degree, accounting degree, or marketing degree. It seems the business world and the world of money can be a bit cut throat at times, and if you don’t know the rules on how to reach and please your consumer with a well-rehearsed, touching goal while still trying your hardest to get a profit for yourself, your business will not succeed. It is important that we can all see through the sugar coated goal and understand the real meaning of making a profit.
But even the ideas of “profit” and what it costs to make a profit are debatable. Depending on who you ask, profit could have very different meanings. For example, accountants view total cost as expenses and depreciation, while economists view total cost as the sum of implicit and explicit costs or as opportunity cost. An explicit cost is a cost paid in money, but an implicit cost is an opportunity cost incurred by a firm when it uses a factor of production but does not make a direct payment. Even the concept of depreciation will vary depending on who you are talking to. Economic depreciation is considered the opportunity cost of the firm using the capital it owns. It is measured in the change in the market value of the capital. On the other hand, accounting depreciation is calculated using IRS rules. Basically, normal profit is the cost of not doing something else with your time, but there are even different types of profit such as economic profit or excess profit.
Why should all of this matter? I assume most of us enrolled in this class want to eventually earn a type of business degree, accounting degree, or marketing degree. It seems the business world and the world of money can be a bit cut throat at times, and if you don’t know the rules on how to reach and please your consumer with a well-rehearsed, touching goal while still trying your hardest to get a profit for yourself, your business will not succeed. It is important that we can all see through the sugar coated goal and understand the real meaning of making a profit.
Indifference
Indifference occurs when a person does not care about something either way. Before the break, we learned about indifference curves and the marginal rate of substitution. According to the textbook, the indifference curve is a line that shows combinations of goods among which a consumer is indifferent.
Indifference curves and the goods compared on them can be customized depending on the person. A preferred place on the indifference curve does not necessarily mean more of both goods, just what number of each an individual prefers.
By looking at the marginal rate of substitution, the rate at which a person will give up more of one good to get another while staying on the same indifference curve, the diminishing marginal rate of substation, the indifference curve, and budget line, we can find the preferred consumer equilibrium. For example, we can see how much movie tickets, good B, can be substituted for gas, good A; you always substitute good B for good A.
I think these are all wonderful tools for economists to use because they allow us to see so much about what a person would prefer and a good consumer equilibrium and we can even derive a demand curve from an indifference curves. In the economic world, I’m sure economists, consumers, and producers are not indifferent to indifference curves.
Indifference curves and the goods compared on them can be customized depending on the person. A preferred place on the indifference curve does not necessarily mean more of both goods, just what number of each an individual prefers.
By looking at the marginal rate of substitution, the rate at which a person will give up more of one good to get another while staying on the same indifference curve, the diminishing marginal rate of substation, the indifference curve, and budget line, we can find the preferred consumer equilibrium. For example, we can see how much movie tickets, good B, can be substituted for gas, good A; you always substitute good B for good A.
I think these are all wonderful tools for economists to use because they allow us to see so much about what a person would prefer and a good consumer equilibrium and we can even derive a demand curve from an indifference curves. In the economic world, I’m sure economists, consumers, and producers are not indifferent to indifference curves.
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