The visible hand in economics

Archive for the ‘Industrial economics’ Category

So since the last post I’ve thought of a few other things I could do to get an idea of pricing behaviour.

First, lets compare the price of petrol per litre (excluding tax) to the $NZ price per barrel of oil:

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Today on Breakfast Paul Henry was stating that petrol prices are far too high, given that crude oil has fallen to $40US a barrel. His criticism was that the retail price of petrol has not fallen at the same rate as crude oil – of course this wouldn’t make much sense given that there are other cost components to the sale of fuel than just the price of crude oil.  However, I was wondering if his criticism that prices were “too high” had any merit.

Now, I don’t have any data, or any analysis to fall back on, when looking at whether the price of petrol is “fair”. However, MED does do some work on fuel prices here. Among the statistics they have a “fuel price margin” page, here. This “margin” tells us what residual is left to give to the importers, distributors, and retailers in the petrol market. Lets have a look at the graphs they provide:

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The DomPost contained an article on the potential for metering Wellington’s water supply. The question is asked: should Wellingtonians pay for their water? This issue is a hot topic, having been discussed at Kiwiblog, Infometrics and TVHE earlier this year.

Historically, water has been provided for by the various Wellington councils out of rates. Water is not currently metered, which implies that regardless of how much water each household takes, their rates do not vary. This arrangement has led many to believe water is in some way ‘free’, as they are not forced to pay for their specific usage and the cost is embodied in rates which cover many council services across many households. With water use of 400 litres per person per day in Wellington, relative to the national average of 160 litres, it appears water users here are not internalising the cost of their water usage.

Current arrangements do not allow for the pricing of scarcity. Read the rest of this entry »

This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:

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I was slightly concerned when I saw the headline on stuff this morning “Nats eye bailout of big business”

If the government is saying ex ante that they will bail out big businesses I would be concerned as this has the potential to cause a moral hazard problem. This is where firms know they will get bailed out and thus make riskier decisions. The actual quotes from Bill English don’t appear the be as explicit as I originally thought they might be

“You’re in an environment when almost anything any government could contemplate doing is getting done somewhere in the world,” he said.

“There is a small chance that events that have transpired elsewhere could transpire here. You can’t ignore that and so we need to give some thought to the extreme event.”

Are quotes like this enough to give the big companies in NZ enough comfort that they will bailed out? Only time will tell….

Apparently the Aussies are blaming Fonterra’s Global Dairytrade online auction platform for lowering the price of milk.

Interesting. If the auction is simply reflecting the true value of milk then the I feel no sympathy. This quote from the manager of the auction system sums up it’s purpose

Fonterra’s global trade managing director Kelvin Wickham said the auction was all about “the international market getting a transparent price” and all global dairytrade was doing was “making it more transparent more quickly”.

As an economist that is music to my ears. On the other hand here’s the quote from the Aussies

“Given things are bleak with the economic outlook, people are holding back on purchasing to see what happens with the auction,” Ms Bills said.

“Mostly, the price doesn’t recover. It is fine to want to have a transparent price system, but why not open at the closing price? If you put a price out there for something in an auction, people see it as a reserve.

“Buyers are waiting to see the price from the auction before they make their purchase.”

So basically they want the auction setup so that it props up the price of milk, can’t say I really have much sympathy for that view….

The previous Labour government bestowed a legacy upon NZ that included the first ever review of broadcasting regulations.

Essentially the question being asked in this review is: does the current market situation warrant government intervention?

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The world price of oil has now declined to under $50US a barrel, a third of it’s peak value (live prices here).

This takes me back to a post we did at the end of May – when fuel costs were pushing up at a rate of knots. The topic was covered in the name: Collusion, multiple equilibrium, and petrol prices.

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In its eternal quest to “not be evil” Google has decided to take on one of the banes of man – himself, and his time-inconsistency.

It is doing this by introducing a new service to gmail.  You can set up this service to significantly increase the transaction cost associated with sending an email when you are drunk!

In the “drunk” state you may think it is a good idea to email your ex girlfriend/boyfriend and say strange things – however, prior to being drunk you may decide that any benefit associated with emailing someone in your drunk state is more than canceled out by the embarrassing phone call the next day.

This feature allows you to increase the cost to writing the email in your drunk state – allowing you to “pre-commit” to not sending embarrassing emails.

With classy features like this you can tell that a genius like Hal Varian is working for them ;)

Today National released their corrections policy, which would allow the private sector to tender for the management of prisons.

Although not a completely ‘new’ concept for New Zealand (Auckland Central Remand Prison was privately run under the last National Government) it nonetheless raises the issue of when is it appropriate for such services to be ‘contracted out’ rather than provided ‘in-house’ by the government.

Hart, Schleifer and Vishny’s “The Proper Scope of Government: Theory and Application to Prisons” asks the question when should a government provide a service in-house, and when should it contract out provision? (Anyone interested in the full article may be able to locate it here).

The authors’ develop a model for asset ownership (in this instance a prison), which can be owned by the private sector, who contract back to the government, or alternatively can be owned outright by the government.

The central finding of the paper is that the private sector has relatively stronger, but seemingly contradictory, incentives to both reduce costs (driven by a profit motive, which comes at the expense of quality) and increase quality (to get a higher price from the government, who is an ongoing buyer of the service). In this instance the quality of a prison entails order in the prison, amenities that prisoners receive and rehabilitation.
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For those of you don’t read stuff.co.nz while they should be working, there are some really interesting tidbits on the latest article about the Warehouse pahsing out the extra concept.

It expected an annualised pre-tax improvement in trading earnings of about $9 million.

i.e. the extra concept has been hemorrhaging money!

Mr Morrice said it was the failure of the hoped-for halo effect – where grocery shoppers also bought general merchandise – that was the main reason for Extra’s dumping.

This has been Matt’s pet topic during this saga (posts here and here). The killer for the halo effect, and the reason why I’ve always believed the Extra concept would fail unless a supermarket owned the warehouse is summed up nicely by Tony Carter from Foodstuffs

“Clearly they did not have the scale”

and Mary Smith of Auckland

“I don’t come here that often. I find their prices expensive compared to the other supermarkets.”

Agnitio

ISCR have just launched New Zealand’s first prediction market.

From iPredict:

Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?

These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – http://www.iPredict.co.nz – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).

The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.

Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …

Mr Burgess says that iPredict is like a simple stock exchange, trading real money.

“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”

Mr Burgess says that prediction markets are the gold standard for forecasting.

“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.

“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …

Anybody can browse iPredict and see the predictions for free by going to http://www.iPredict.co.nz but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.

Get some money on your account and get predicting.

Goonix

I’m always confused when I hear the economists are against strikes. After all, it is perfectly sensible to place strikes in the bargaining relationship between employees and employers.

I think the confusion stems from the fact that many economists also say that there is a definite limit to strike action – as if it is set up by a significantly powerful union it merely represents the action of a monopoly against a weaker consumer (in this case the firm). As we know that market power leads to suboptimal outcomes, the case of a strong union and a weak firm will lead to a suboptimal outcome – namely too little production, because too much of the surplus is extracted by the seller (labour).

However, this does not imply that economists are completely against the option of striking being available.

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In the following story on Stuff, we are told that a New Zealand wine maker has sold a whole bunch of wine for $3.50 a litre – an incredibly low price for the premium brand.

The reason for these “firesales” of wine we are told is:

these big sales come on the back of a bumper harvest this season, resulting in surplus stock

So winemakers have had a bumper season – and as a result they are having to sell some of their wine excessively cheaply. Doesn’t this seem weird.

Well it makes complete sense when we think either:

  1. There is competition in the wine industry or,
  2. The wine company is able to price discriminate between markets

Discuss :)

The recent Sonny Bill Williams saga has brought into light the issue of salary caps in competitive sport. After fleeing the Australian NRL for French Rugby Union, SBW made the claim, among many other bizarre excuses, that the NRL’s salary cap was anti-competitive, in that it prevented players from earning their full-potential.

Does SBW have a valid point?

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