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    Standing In Line

    Apr 15 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Thinking Economically, Uncategorized • 1043 Views

    Walking along 56th Street in NYC, maybe a half block before 5th Avenue, I always see people on line. (New Yorkers say on line. Almost everyone else says in line.) They are waiting to enter Abercrombie & Fitch.

    Usually we associate an economic cost with a line. Time wasted. Irritation. Inadequate customer service. For Abercrombie, though, it might be a benefit.

    Researchers from the University of Chicago Business School concluded that total queue length conveys the value of a product. The longer the line, the better it must be. In addition, they found that the number of people behind you is crucial. If we are ahead of many others, feeling a sense of accomplishment, we attribute more value to our goal. In one example, the researchers actually found that when there are many people behind us, we also tend to spend more.

    Amazing. A long line snaking for blocks at an Apple store. And most of us think about the value of the product rather than the long wait.

    Our Bottom Line: Queues are all about cost and benefit. If the vendor enables us to perceive a benefit, then a line like the one at Abercrombie can become a competitive strategy.

    If you just want to enjoy hearing about lines, this 99% invisible podcast is a pleasure. For a more serious read, here is the U. of Chicago paper.

    And a final thought… wasn’t it the lines that brought down communism? But that is a different story.

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  • US Chicken Paw Exports to China

    Chicken Economics

    Apr 14 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Government, Macroeconomic Measurement, Money and Monetary Policy, Uncategorized • 918 Views

    Ten chicks.

    If I were teaching in Uzbekistan instead of Summit, NJ, I might have received 10 Serbian chicks as a part of my salary. According to Radio Free Europe, the Uzbek government partially paid certain teachers and doctors with chicks. Their goal was to increase domestic production of eggs, milk, other dairy products and vegetables.

    Elsewhere also, chickens represent more than a meal.

    During the 1990s, during a food shortage, Russia accepted massive exports of surplus dark chicken meat from the US. Still today, dark meat in Russia is called Bush legs and associated with neediness.

    For U.S. chicken raisers, Chinese love of chicken paws was a life saver. As a Purdue representative explained it, U.S. consumers loved the white meat. What to do with everything else? For years, inexpensive pet food was the answer. However, when Purdue discovered that the Chinese especially loved U.S. chicken paws, suddenly, they had a money maker. Large (Purdue) chicken breasts mean juicy feet and the Chinese like juicy feet.

    We’ve accounted for the breasts, dark meat and paws. What about the wings? Maybe the Super Bowl?

    Our bottom line: Chicken shortages and chicken surpluses relate to international trade. Citing comparative advantage, David Ricardo (1772-1823) said that trade enables nations to optimize efficiency and thereby increase world production and well-being. For U.S. chicken producers, exporting what had been waste certainly created value. With the Uzbeks, though, payment in imported Serbian chicks rather than money is a step backwards.

    Radio Free Europe and the Atlantic tell more of the Uzbekistan chicken story. For the China and Russian chicken situation, Businessweek and Freakonomics explain. And here, econlife looks at chicken wings.

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    Size Inflation

    Apr 13 • Behavioral Economics, Businesses, Economic Debates, Macroeconomic Measurement, Uncategorized • 746 Views

    Inflation is not only at the cash register.

    Our story starts at H&M where an Esquire journalist tried on a size 36 pants that were too tight. He continued his search for pants with the 36″ waist label at Old Navy and they were too loose. After that, he sampled a pair of Dockers. Curious, this gentleman did the math. The H&M pants had a 37″ waist, Old Navy, 41″ and Dockers, 39.5″.

    Women also have experienced some “downsizing.” Graphing size changes in the UK, The Economist concluded that women’s sizes have plunged by 2 numbers. If you wore a  size 14 several years ago, now it is labeled a 10. If you wore a 4 or a 6, your size might have declined to a double zero.

    Size inflation–the trend toward smaller sizes getting larger—has its pros and cons. While smaller sizes make us feel good and might elevate retail sales, they enable us to ignore weight gain.

    The bottom line: Price inflation also has pros and cons. Saying that inflationary policy helps borrowers, lowers unemployment, and makes holding cash less attractive, Paul Krugman supports expansionary Fed policy. By contrast, a more traditional view suggests that inflation is a hidden tax that distorts price signals, punishes savers, and creates a less stable business environment.

    So, whether we are at the clothing rack or the cash register, we should think about inflation.

    Here is the journalist who looked for the size 36″ waist, an Economist chart of size inflation, a Bloomberg columnist worrying about inflation and Paul Krugman asking for more. The CPI data is here.

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    Opposing Austerity

    Apr 12 • Behavioral Economics, Economic History, Environment, Government, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 706 Views

    Thinking about our fiscal woes, I keep returning to the fallacy of composition.

    Here it is:

    When one farmer harvests a huge crop and sells it, her profits soar. But if every farmer grows more and sells more, then the price drops. Similarly, if one person races out of a theater, she easily exits. When many do, it is tough to get out.

    The point? Sometimes what is good for a single person becomes a problem when everyone does the same thing. Economists call it the fallacy of composition. Harrisburg, Pennsylvania’s fiscal plight reminds me of the fallacy of composition.

    The Harrisburg story begins when they decide to retrofit their trash incinerator with borrowed money. If every garbage truck pays a fee, the incinerator business can be exceedingly profitable. At first though, the mechanics do not work and then the EPA says the facility does not meet federal standards. Each time, the community borrowed and upgraded. The result? The incinerator cost $326 million. A city with 50,000 people owes $326 million. And then the recession hits. The result? A debt crisis.

    With local officials resisting, the governor of Pennsylvania mandates austerity. His representative says sell municipal parking garages, cut fire and police wages and pensions, sell the incinerator. But, the Harrisburg city council, a 4-3 vote, says no.

    Responding to individual incentives, law makers reject the austerity policies that are best for their community. Individual law makers are each doing what is best for them. Anyone who supports tax hikes, wage freezes and pension cuts might not get re-elected. And then ultimately, as with a farmer’s bumper harvest or a fire in a theater, when enough law makers act similarly, everyone suffers. Sounds like the fallacy of composition.

    My Bottom Line? For controlling Medicare and Social Security spending, do we have a fallacy of composition problem?

    This article tells the whole Harrisburg incinerator story while NPR’s Planet Money tells the sad tale of the receiver who was sent to Harrisburg to solve their fiscal problems. As for Greek legislators, as this article tells us, the bribes that flowed to legislators will evaporate if they support austerity.

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  • hedgehog

    Hedging Health Risks, Hedgehog Style

    Apr 11 • Businesses, Demand, Supply, and Markets, Households • 855 Views

    By Mira Korber, guest blogger.

    Oppressive fluorescent lights, the antiseptic squeak of rubber soles on linoleum, and the omnipresent pulse of machines envelop you at the hospital. You’re anxiously awaiting the results of surgery on your beloved family member.

    Her name is Harriet, she’s a hedgehog, and this actually happened.

    This (just slightly) unusual medical story is the result of pet medical insurance. (NB: The purpose of any health insurance is not to pay for medical procedures, but rather to hedge against risk of medical disaster [see this Econlife post.])

    Without the coverage, would Harriet would have undergone treatment? Maybe, maybe not. 

    Why? The proliferation of pet health insurance demonstrates a changing series of behavioral incentives. Logically, the more coverage you have for your pet, the greater the incentive to supply costly care and medications. Then, will you see an incentive to own more pets because insurance covers advanced treatments? Disregarding the cost of vet school, will more students see a lucrative future in veterinary fields?

    A segment from NPR “This American Life” episode 392  exemplifies how incentives change for pet owners with insurance. Quoting a report from the National Commission on Veterinary Economic Affairs, NPR reports, “‘with pet insurance, clients likely will use your services even more often and opt for more advanced medical procedures.'”…insurance can reduce  ‘price resistance on the part of the client…with cost concerns removed, clients become more engaged and more responsive.'”

    Additionally, these statistics express the nature of a growing pet insurance market (cited from an informative USA Today article):

    • Pet insurance costs from $15-$75/month, and covers 80-90% of claims
    • Dogs are insured 4x more than cats
    • 1% of American pets are insured, compared to Europe’s 20%
    • In 2011, Americans spent $50.8 billion on pets; $14.1 billion was health related expenditure


    The Bottom Line? By providing health insurance to four-legged family members, owners are more willing to leap for the big-ticket bills. By the same token, vets are more likely to prescribe expensive procedures.

    Find some interesting reads and blog source material below:

    Details on Harriet the hedgehog. Information on dogs and the American economy, here.
    VPI Pet insurance. And finally, The cost of advanced procedures, without insurance.

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