• Everyday Economics for Amazon and Uber

    How Uber and Amazon Use Pricing Power

    Dec 1 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Entertainment, Fashion, Innovation, Uncategorized • 585 Views

    At 1 am or so, in Boston, in 2012, Uber saw that many of its drivers were heading home just when party goers needed them. I guess someone had an “Aha” moment and suggested that drivers be paid more to stick around. With drivers earning more and customers getting the transportation that had previously been unavailable, it was win-win. And that was how Uber’s dynamic pricing began.

    Where are we going? To how dynamic pricing based on current supply and demand has spread to cyber shopping.

    Dynamic Prices

    Dynamic pricing has been around for a long time. In movie theaters midweek matinee patrons pay less than Saturday night movie goers. Somewhat similarly, tickets to more popular sporting events are priced higher as are Saturday reservations at some restaurants. Coke has even experimented with raising vending machine soda prices when the temperature hits a certain high but stopped because of customer anger.

    Airline dynamic pricing began after the industry was deregulated in 1978. Faced with young upstart discount competitors like People Express, American Airlines said there had to be a better way than giving everyone a bargain. So, they started charging less to travelers who stayed over a Saturday, who were willing to buy non-refundable tickets, and who could book months in advance. They didn’t say that they had discovered how to separate the business traveler who was price insensitive from the vacationer who pinched pennies. And instead of telling the business traveler the tickets were more expensive, they sugar coated the discretionary traveling experience by saying we got a discount.

    With the holiday season here, Black Friday behind us and cyber Monday morphing into several weeks of online shopping, I was curious about Amazon’s dynamic pricing. It turns out that they could be changing prices 2.5 million times during one day according to internetretailer.com. From item to item though, the activity varies with power tools’ prices fluctuating much more then apparel.

    While this WSJ graphic is from 2012, recent articles in internetretailer indicate it remains accurate.

    Amazon's pricing power

    From: WSJ

     

    Our Bottom Line: Pricing Power

    Pricing power is shaped by the market in which a firm competes. Whereas farmers in perfectly competitive markets are price takers because the market dictates what they charge, in monopolistic competition, firms have some power. For that reason, in many of the markets where we find Amazon and Uber, they engage in dynamic pricing because they have some price making capability. By contrast, as an oligopoly with considerable price making power, Apple does not engage in dynamic pricing.

    And finally…dynamic pricing has hit bricks and mortar. I just read about one store in Great Britain that experimented with dynamic pricing for each customer. They did it with personalized prices next to items still on the shelves. Still though, stores say they worry about the wrath of customers who discover they paid more for an item this morning than someone else, this afternoon.

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  • Everyday Economics — Oil stories

    Three Graphs That Tell the Whole Oil Story

    Nov 30 • Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Environment, International Trade and Finance, Lifestyle, Macroeconomic Measurement • 535 Views

    Touching four year lows, West Texas Intermediate (WTI) light crude and North Sea Brent are creating an emotional divide. While the airlines are smiling…

    % increase in stock price during the past week:

    Law of Supply for oil helps airlines on demand side

    The big U.S. oil companies are not happy.

    % decrease in stock price during the past week:

    Law of supply hurts big oil companies' stock.

     

    Below, you can see breakeven numbers for shale. With prices sliding below $70 for WTI and Brent, high end producers will start to shrink output.

    Law of supply story about shale production

    From: Businessinsider

     

    Our Bottom Line: The Law of Supply

    And that takes us to a classic law of supply story. When price plunges, the quantity producers are willing and able to provide also sinks. The interesting part of the story, though, is a supply war. It is possible that more powerful OPEC members like Saudi Arabia are not trying to stem the oil price slide because they hope to obliterate U.S. shale operators.

    So, while the airlines might be happy from the spillover (a positive externality), a climbing price from fewer producers and inventory depletion could soon eliminate their smiles. But that will be another supply story.

     

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Turkey to Buffalo

    Nov 29 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Humor, Entertainment, Government, Labor, Lifestyle, Macroeconomic Measurement, Regulation, Sports, Thinking Economically • 506 Views

    Our Posts Roundup

    Everyday economics of an oligopolySunday 11.23.14 When a $200 sneaker sells for $8,000…more

     

    Everyday economics of football and marginal costMonday 11.24.14 Why football teams can be expensive…more

     

    Everyday economics of the unemployment rate Tuesday 11.25.14 The hidden side of the unemployment rate…more

     

    Everyday economics of an OPEC mythWednesday 11.26.14 OPEC’s big secret…more

     

    Income inequality dilemmas are timeless whether looking now or at 1623 Plymouth.Thursday 11.27.14 How to slice the Thanksgiving (economic) pie…more

     

    Economic analysis explains why we eat turkey on Thanksgiving.Friday 11.28.14 The top ten list for eating Thanksgiving turkey…more

     

    Ideas Roundup

    • innovation
    • competition
    • oligopoly
    • marginal cost and benefit
    • GDP growth rate
    • unemployment rate
    • supply and demand
    • inequality
    • regulation
    • redistribution

     

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  • Economic analysis explains why we eat turkey on Thanksgiving.

    A Thanksgiving Top Ten List

    Nov 28 • Behavioral Economics, Demand, Supply, and Markets, Economic History, Economic Humor, Government, Households • 522 Views

    The turkey should have been our national bird. Hearing that the bald eagle had been selected, in a 1784 letter to his daughter, Ben Franklin explained why he preferred the turkey:

    “For my own part I wish the Bald Eagle had not been chosen the Representative of our Country. He is a Bird of bad moral Character…too lazy to fish for himself, he watches the Labour of the Fishing Hawk; and when that diligent Bird has at length taken a Fish, and is bearing it to his Nest for the Support of his Mate and young Ones, the Bald Eagle pursues him and takes it from him…”

    “…For the Truth the Turkey is in Comparison a much more respectable Bird, and withal a true original Native of America… He is besides, though a little vain & silly, a Bird of Courage, and would not hesitate to attack a Grenadier of the British Guards who should presume to invade his Farm Yard with a red Coat on.”

    Where are we going? To the economic reasons we ate turkey yesterday. (Explained first, the top ten list is further below.)

    The Reasons We Eat Turkey

    Thinking back to Ben Franklin, as an American bird, the turkey has had “utility” (a source of demand) because it connects to our national identity. Also during the 18th century, with most people living on the farm, the alternatives were cows, hens, roosters, venison or swans. But cows and hens were more valuable alive than dead, roosters are tough, you had to hunt for your venison and swans taste fishy unless you feed them a special wheat diet. So, whether considering utility, substitutes or opportunity cost, the turkey was the best choice.

    Thanksgiving got a government endorsement when President Lincoln declared it a national holiday in 1863 and maybe Charles Dickens added to the turkey’s cachet with A Christmas Carol because Scrooge gave a turkey to the Cratchit family for their holiday dinner. But, much more more convincing than Charles Dickens, size and price add to the turkey’ s allure.

    And that takes us to today.

    A 16-pound turkey will cost you close to $21.65, 11 cents less than last year in current prices.

    Our Bottom Line: Top Ten Economic Reasons For a Thanksgiving Turkey

    • 10. Ben Franklin liked the turkey.
    •  9. Utility: American identity and one turkey feeds many.
    •  8. Opportunity cost: low price means less sacrifice.
    •  7. Substitute goods: better than cows, roosters, venison, swans.
    •  6. Complementary goods: irresistible stuffing and mashed potatoes.
    •  5. Government: official mandate.
    •  4. Marginal benefit: annual turkey price is stable.
    •  3. Globalization: leftovers include turkey curry and turkey tacos.
    •  2. Behavioral economics: short term pleasure worth long term cost.
    •  1. After eating too much turkey on Thanksgiving, we are happy to wait a year to eat it again.

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  • Income inequality dilemmas are timeless whether looking now or at 1623 Plymouth.

    A Bigger (Thanksgiving) Pie or Equal Slices?

    Nov 27 • Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement, Regulation • 469 Views

    Our annual Thanksgiving post:

    Sort of like today, in 1623, Governor William Bradford had income inequality dilemmas.

    Two years after the first Thanksgiving, Plymouth Colony Governor William Bradford increased their food supply. The problem, he concluded, was that people shared whatever they produced. Because they expected “able and fit” young men to work harder and then give their food to others, all worked less. As Bradford explained, ”So they began to think how they…could…obtain a better crop than they had done…At length…the Governor…so assigned to every family a parcel of land…This had very good results for it made all hands very industrious…”

    In 1623, the questions were about redistributing the food supply from those who produced it to those who needed it. Now income redistribution questions are about spending on the Affordable Care Act, entitlement programs like Medicare and Social Security, and marginal tax rates.

    But still, like Governor Bradford and the people of Plymouth, we are talking about the size of the pie and how unequal each slice should be.

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