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    Airline Mergers and Coffee

    Feb 23 • Businesses, Demand, Supply, and Markets, Economic History, Labor, Regulation, Uncategorized • 583 Views

    What to do when one airline uses a potent Starbucks bean, the other a weak Fresh Brew blend and they merge? After 14 months, Continental and United finally decided.

    Described in Bloomberg Businessweek, our story starts with a 14 member beverage committee and 12 different beans. After sampling each one, they selected a light roast from Fresh Brew that company executives and more than 1,000 flight attendants also liked. On July 1, passengers were served the new coffee.

    Then the problems began. Continental’s fliers objected to the watery blend, United’s loyalists wanted weaker coffee, and United’s onboard coffee equipment leaked extra water into the pot when the new pillow packs were brewing. Told about “howls of protest,” the beverage committee re-assembled and started all over again.  This time they chose a medium roast. If you fly United on March 1, you will be one of the first to sample it.

    And this was just the coffee!

    Combining 2 airlines is a monumental task. Everything from technology to uniforms are debated. Having merged 6 years ago, US Airways and America West have not completed the details. As for the Delta/Northwest combination, which began in  2008, they still are not done.

    Illustrating everything from mergers to industry leaders to departures, this interactive graphic wonderfully displays changes in the airline industry since 1990.

    The Economic Lesson

    Brewing 62 million cups of coffee a year because of the merger, the new United has achieved more cost efficiency when it buys beans. Because “legacy” carriers like United and Continental are burdened by higher costs, they have had to merge to compete against Southwest and other discount airlines.

    An Economic Question: After the airline industry was deregulated in 1978 how did competition change flying? This article provides some facts.

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    Disaster at Waffle House

    Feb 22 • Businesses, Demand, Supply, and Markets, Economic Humor, Thinking Economically • 713 Views

    By Mira Korber, guest blogger.

    Just last week, a desperate pit-stop at the iconic southern restaurant chain, Waffle House, proved the very worst of my life’s infrequent fast-food exploits. Mid 1,300 mile road-trip, the black letters on yellow signage hailed the only game in town open after 10pm, so — being a northerner myself — I decided to see what this waffle thing was all about. At any rate, my “T-bone steak with eggs” was more steak tartar with yellow and white goop, but I promise not to disintegrate any further into my anti-Waffle House tirade, because the company’s economic relevance is far more interesting.

    Apparently, the Wall Street Journal’s “Waffle-House Index” is a term referring to (non-gastronomic) natural disasters. With over 1,600 locations in the South, people have come to rely on the status of their nearby Waffle House to measure the severity of weather crises. The company’s trademark is its 24-hour operation, so when locals see a closed restaurant, they know things are pretty bad. The official Waffle-House Index is conveniently color-coded to signify just how problematic a disaster may be.

    The shining beacon of 24 hour goodness since 1955, Waffle House ranks among the best disaster recipes and disaster indicators. Why, it’s even a great venue for disaster to strike. Read this excellent NY Times article about a recent string of shootings at Georgia Waffle Houses. A loyal customer even says she’ll keep returning to Waffle House even though there might be the minor risk of gunpoint robbery.

    And, perhaps needless to say, this article is not mentioned on the “In the News” page on the Waffle House site.

    The Economic Lesson

    A true port-in-the-storm, Waffle House competes through its dependable image. To differentiate itself from other fast-food and low-end restaurant competitors, Waffle House allows you, the ravenous customer, to chow down anytime hunger strikes. Regardless of its food quality or crime rates, it’s open, reliable, and will feed your grumbling stomach.  24/7, stop in to Waffle House for a bite, which is more than you can say for a neighboring Olive Garden or Arby’s.

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    Marital Economics

    Feb 21 • Behavioral Economics, Demand, Supply, and Markets, Gender Issues, Households, Labor, Thinking Economically • 829 Views

    By Mira Korber, guest blogger.

    When Bill Clinton said Hillary Rodham was “the smartest person [he] ever met in [his] lifetime,” he was definitely expressing a changing long term trend: what husbands value in their future wives.

    According to the study cited in this interesting NY Times Op-Ed, now is a better time than ever for highly educated women’s marriage prospects. In 1939, “education and intelligence” were ranked 11th on a desirable traits list; by 2008, the same category had risen to fourth place.  That placed women’s smarts above a “pleasing disposition,” number five on the 2008 wish list.

    Even in 1950, 33% of all women with a college degree remained unmarried as opposed to a mere 7% of non-college educated women. By 2008, the gap had vanished for degree-holding women aged 35 to 39, and only 9% of college-educated women 55 to 59 were still unmarried.

    This paper, by economist Elaina Rose, discusses the economic theory of marriage, the “marriage market,” and trending changes from 1970-1990. According to the paper, marriage market “specialization” has declined as women now complete comparable or greater educational degrees with respect to men. Therefore, the female role in the labor market is on the rise. Ms. Rose also predicts that hypergamy (marrying “up”) is overall on the decline for the coming years.

    And while it’s a good time for educated women to marry, more and more aren’t marrying at all.

    The Economic Lesson

    Every decision you make has an opportunity cost: what you sacrifice by making a choice. In other words, whenever you choose one thing, you always give something else up.  You may choose to get married; staying single is your opportunity cost. You may choose to pursue a masters’ degree; turning down that job offer straight out of college is your opportunity cost.

    These sacrifices represent trade-offs. The list of desirable female traits from 1939-2008 represents changing preference of an aggregate group of men. Here you can find relevant mathematical models and equations in another Elaina Rose paper: “A Joint Model of Marriage and Partner Choice,” which discusses how people choose their “optimal” partners for life.

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    Our Shopping Habits

    Feb 20 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Uncategorized • 853 Views

    Our story starts during the 1990s. When Procter & Gamble (P&G) first advertised Febreze as a room deodorizer, they thought it would be an instant success. However, the households that most needed it did not respond and sales were tepid.  Realizing they had targeted the wrong people, P&G had to reconsider their market. The results were new ads that had a homemaker smiling as she sprayed Febreze after completing her chores.

    P&G was successful because they understood our habits. Once businesses know the patterns we habitually follow, they can figure out how to insert their products into our lives. For P&G, that meant connecting Febreze to homemakers’ cleaning habits.

    According to the NY Times Magazine, Target also understood how to use our habits to increase their sales. The key was data that let them identify which shoppers might soon become parents. Knowing that new parents altered their established shopping habits, they offered coupons that would expand what they bought at Target precisely when they were susceptible to change.

    Our bottom line: Based on their understanding of our habits, P&G and Target used different competitive methods. How they competed depended on their market structure.

    The Economic Lesson

    Moving from most to least competitive, there are 4 basic market structures: perfect competition, monopolistic competition, oligopoly, monopoly.

    Oligopoly and monopolistic competition frequently necessitate product differentiation. As an oligopoly, P&G faces few firms with similar products.  By contrast, as a monopolistically competitive firm, Target competes against many firms selling the same items.

    Both, though, have to let consumers know what is special about what they sell. For P&G, ads displayed Febreze as a reward. For Target, strategically timed coupons differentiated them from others who might not have the same information about their customers

    In The Power of Habit, a new book by Charles Duhigg, you can read more about how our habits affect our purchases.

    An Economic Question: Focusing on a firm such as Coca-Cola, explain specific ways in which an oligopoly competes.

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  • 19th Century Urban Transport Was An Environmental Problem

    Green New Yorkers

    Feb 19 • Behavioral Economics, Economic Debates, Environment, Government, Households, Regulation, Thinking Economically, Uncategorized • 603 Views

    Think about life in the city. A one-bedroom apartment might have 1000 square feet located next to several other similar dwellings and all are heated and cooled by the same source. You walk nearby to get your groceries and take the subway or bus to work or school. Rather than a hybrid car, the energy efficient passenger vehicle that you use most frequently is the elevator.

    The result? According to New Yorker writer David Owen, being green in Manhattan is very simple. You just have to live there.

    But then, you move to the suburbs and transform your carbon footprint. You buy one car and then two. You have a house to heat and cool. You even have an extra refrigerator in your garage or basement. Everywhere, to school, to dine, to shop, you have to drive.

    Our bottom line: Sometimes it takes counterintuitive reasoning to assess environmental impact.

    Or, as Kermit said, “It’s not easy being green.”

    The Economic Lesson

    High density urban areas have much less of an environmental impact than low density municipalities.  Harvard economist Edward Glaesar points out that “a single family detached house uses on average 83% more electricity than urban apartments within the United States.” Correspondingly, in his New Yorker article, David Owen talks about the high density environmental benefits of skyscrapers.

    I recommend this Econtalk podcast with David Owen on the “conundrums” of being green and this econlife post on the unintended impact of wind farms and locovores.

    An Economic Question: Should national leaders tilt environmental policy toward urban favoritism?

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