• everyday economics and sisplaying conspicuous consumption, China's growing middle class wants more Prada while the very affluent want more elite brands.

    Where Prada is Called Ordinary

    Apr 7 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Economic Humor, Economic Thinkers, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 176 Views

    Some wealthy Chinese consumers seem to think that Prada has become “ordinary.” Aspiring to convey their elite status, they are avoiding luxury brands that the less affluent can afford. As a result, because their middle class popularity is exploding, Louis Vuitton, Prada and Gucci are getting slighted by high-end consumers. Business Insider quoted a billionaire consumer saying about Louis Vuitton, “”Everyone has it. You see it in every restaurant in Beijing. I prefer Chanel or Bottega Veneta now. They are more exclusive.”

    In this luxury spending pyramid, you can see that Prada’s leather goods and clothing for women and men are classified as “accessible core.”

    Conspicuous consumption is diminishing Prada sales.

    Where are we going? To China’s asirational middle class

    China’s Middle Class

    The middle class can have so many different meanings. For China, a working paper from Johns Hopkins suggests we limit our definition to a modern, urban lifestyle and a white collar occupation. As a result, China’s current middle class numbers would be no greater than close to 50 million or six percent of her population. However, below, you can see that only five years from now, those numbers will multiply:

    Conspicuous Consumption and China's growing middle class.

    From: “China’s Middle Class: Content in the ‘Middle Income Stratum’ or Seeds of Political Change?”

     

    More specifically, the author of the The Bling Dynasty provides an identity to China’s middle class through five prototypes. His least affluent individual speaks no English, is 26 years old, lives in a “third tier city,” and is a manager in a Chinese textile factory. Looking at our luxury goods pyramid (above), he purchases items at the bottom. Next up on the affluence ladder, able to afford the “accessible core” of the pyramid is a 30 year-old man who runs a property business. Then, continuing up the pyramid, we meet a 22 year-old woman who works in advertising, attended college and is upward bound with a more affluent boyfriend who buys her presents from Tiffany. After that, we have ascended into an affluent minority of white collar executives.

    Summarizing middle class aspiration in China (and indeed anywhere), we can quote a young woman on a Chinese dating show who was asked what she wanted in her man. She replied “To be honest, I’d rather cry in the back of a BMW than laugh on the back of a bicycle.”

    Our Bottom Line: Conspicuous Consumption

    Thorstein Veblen originated the idea f conspicuous consumption

    According to economic thinker Thorstein Veblen (1857-1929), affluent consumers try to convey their power and wealth through excessive leisure and shopping. Servants and employees help the affluent do less while their money lets them signal their status by buying more. As expressed by Veblen, “The members of each stratum accept as their ideal of decency the scheme of life in vogue in the next higher stratum, and bend their energies to live up to that ideal.”

    Isn’t Veblen is describing our luxury shopping pyramid?

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  • Everyday economics and dollar coins

    Why a Dollar Coin Might Not Be Money

    Apr 6 • Economic Debates, Economic History, Economic Thinkers, Financial Markets, fiscal policy, Government, Money and Monetary Policy • 154 Views

    In the Pacific Ocean, on the tiny island of Yap, limestone disks are money. By inserting a pole through the wheel’s center hole, the smaller ones can be physically exchanged. Meanwhile, the larger ones that could weigh several tons remained stationary. In a 1991 paper, Nobel Laureate Milton Friedman explained that even when one valuable massive wheel was lost at sea, its owners could still use it as if “it were leaning visibly against the side of the owner’s house…”

    The Yap money supply is composed of limestone discs.

    From: archaeology.org

    Where are we going? To how we decide what is money.

    And that takes us to dollar coins.

    The Dollar Coin Problem

    Between 1979-1981 and in 1999 we had the Susan B. Anthony dollar coin. Then from 2000-2008 there were Sacagawea Golden Dollars. And more recently, the Congress proclaimed that starting with George Washington new presidential dollar coins would be minted each year.

    Nothing worked.

    So knowing we preferred our paper money, the Congress gave up. But it also helped that the Federal Reserve figured out how to throw out fewer paper bills. With new sensors on their high speed sorting equipment, they no longer discarded upside down bills that could be circulated. As a result, the average lifespan of a dollar increased from 18 to 70 months. A longer life meant we could spend less making new ones.

    Money supply and more dollar bills

    From: qz.com

    The U.S. dollar coins that still circulate are in vending machines, coin jars at home where we save change and Latin American countries where the damp weather makes them more desirable than paper currency. The remaining $1.34 billion of dollar coins are stored in the Fed’s vaults.

    The money supply and the dollars coins we do not use.

    I suspect that as long as the metal coin has a paper equivalent it is doomed.

    Our Bottom Line: Money Supply

    The dollar coin only had two of the three basic characteristics of money:

    • It should be a medium of exchange. (People willingly use the commodity for exchange.)
    • It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
    • It should be a measure of value. (When someone says one dollar, you know what that means.)

    But Yap money has all three.

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  • Everyday economics and boosting baseball popularity

    What New Coke Could Teach Baseball

    Apr 5 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Innovation, Lifestyle, Media, Sports • 131 Views

    • “To the Master Dodo this concerns: What ignoramus decided to change the formula of Coke?!?! The new formula is gross, disgusting, unexciting, and WORSE THAN PEPSI!!”

    Coke consumer, Anniston, Alabama, May 12,1985

    • “We want the old and wonderful Coke back PLEASE. Keep the ‘New’ Coke if you want and call it Cokesi if you like. . . .”

    A Coke loyalist

    When Robert Goizueta became Coke’s CEO in 1981, the Pepsi Challenge was growing. Whereas in 1955 Coca-Cola sales were double those of Pepsi, by 1984 Pepsi was behind by only 4.9 percent. Furthermore, the combined sales of Diet Pepsi and Pepsi Light exceeded Coca-Cola’s Tab. To the executives at Coke, it was “the Pepsi Challenge” that was becoming “the real thing.”

    Where are we going? To how innovation can backfire.

    Coca-Cola initiated Project Kansas in 1984. Its goal was to develop a new taste for Coke. However, assessing the consumer’s reaction to a newly formulated Coke was somewhat tricky because no one could actually disclose that the goal was a replacement for Coca-Cola. Field testing, therefore, had to be somewhat oblique. But the results were conclusive. People liked the new flavor and Pepsi drinkers even said they might switch.

    The New Coke Surprise

    There were satellite hookups around the country with film crews, and journalists awaiting the big announcement. From New York’s Lincoln Center a razzle-dazzle media extravaganza unfolded with the Grand Canyon, old Coke commercials, wheat fields, and cowboys. From the stage in front of an audience of seven hundred, Roberto Goizueta exclaimed, “The best soft drink, Coca-Cola, is now going to be even better.”

    All appeared to go well until the questions began. Asked one reporter, “Are you one hundred percent certain that this won’t bomb?” Another said, “… if we wanted Pepsi, we’d buy Pepsi.”

    The reporters’ questions at Lincoln Center foreshadowed a public outcry. Two months after the announcement, eight thousand telephone calls poured in daily. During a sports event at the Houston Astrodome, people booed the commercials for New Coke that flashed across the viewing screens.

    Within weeks, they knew they had made a monumental mistake. CEO Goizueta, said that after he announced Coke’s decision, he slept like a baby: “I wake up crying every hour.” Quickly, they sought to minimize the damage. The decision was made to retain new Coke as a “sister” to the older version which henceforth would be known as Coke Classic.

    When asked by a reporter whether he would have proceeded with New Coke had he known the furor that would
 reverberate across the nation, Roberto 
Goizueta, replied with a Spanish proverb: “Si mi abuela
tuviera rue das, seria bicicleta”—”If my grandmother
had wheels, she would be a bicycle.”

    The Baseball Market

    Similar to Coke’s worries in 1984, baseball’s viewership is decreasing. And, just like Coke, baseball might change its formula.

    Competitive strategies to increase viewership

    Translated into viewers, for 1978, the total was 44,278,950. In 2012 12,700,000.

    To increase its audience, MLB’s first target could be game time. Averaging from 2.5 hours during the 1970s, game times now exceed three hours. The clock is ticking as David Ortiz rubs his hands and adjusts his glove while we have a 28 second wait for many of David Price’s pitches. And you know when relief pitchers warm up, the third baseman talks to the pitcher, strolls to the catcher, then the pitching coach. Meanwhile, a batter’s song can last 30 seconds when he approaches the plate and they can step out of the batter’s box after every pitch.

    We can ask though what is strategy, what is psychological warfare and what composes the baseball identity.

    Our Bottom Line: Competitive Strategies

    Whether looking at an oligopoly like Coca Cola or a monopoly like major league baseball we see the supply side has the power to decide how it will compete. Their challenge is making the wise decision.

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Thirsty Almonds to Potent Alcohol

    Apr 4 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Humor, Education, Environment, Financial Markets, Labor, Money and Monetary Policy, Thinking Economically • 130 Views

    Our Posts Roundup

    Everyday economics and performance metrics can create a perverse incentive. Sunday 3.29.15

    The problem with job evaluations…more

    Everyday economics and almond water demand Monday 3.30.15

    California’s thirsty almonds…more

    Everyday economics and the wealth gap Tuesday 3.31.15

    Disagreeing about the size of the wealth gap…more

    everyday economics and risk for pop musicians Wednesday 4.01.15

    When it’s risky to be a musician…more

    everyday economics and responding to supply and demand, U.S. farmers are growing less corn and more soybeans and sorghum. Thursday 4.02.15

    The connection between corn and baijiu…more

     

    Human capital in U.S. elite jobs are dominated by Ivy League graduates. Friday 4.03.15

    Questions about elite college diplomas…more

     

    Ideas Roundup

    • human capital
    • incentives
    • unintended consequences
    • behavioral economics
    • cost and benefit
    • exports
    • tradeoffs
    • income inequality
    • wealth
    • risk
    • supply and demand
    • markets
    • income
    • selection bias

     

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  • Human capital in U.S. elite jobs are dominated by Ivy League graduates.

    Does the Ivy League Diploma Matter?

    Apr 3 • Behavioral Economics, Economic Humor, Education, Labor • 164 Views

    Groucho Marx once said, “Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.”

    Where are we going? To whether college applicants would fare best at an elite school because they care about their earnings.

    Ivy League Acceptances

    Let’s start with an idea of how many people we are talking about. You can see below that the numbers are relatively small.

    Human capital and Ivy League acceptance rates

     

    Other Elite Schools

    In addition to the Ivy League, we can add schools that are also elite because they too attract the top one percent:

    Human capital ability at elite schools.

    From: “Investigating America’s elite: cognitive ability, education and sex differences.” The list ends at #28.

     

    Jobs and Earnings

    Now we can go to jobs to see where the elite college grads work. Considering the small number of acceptances, you can see their disproportionate presence in high paying, powerful positions.

    Human capital from elite schools and jobs

    From: “Investigating America’s elite: cognitive ability, education and sex differences.”

     

    But, does this mean that the elite school diploma is the reason for their grads to be in those higher paying jobs? According to the MIT/LSE authors of Mastering Metrics, “No.” The reason it looks that way is selection bias. In a chapter on regression, they explain that you have to compare “equal people” at an elite school and a state college. Once you have equal ability and the same gender, the pay gap closes. Then, if you control for “OVB” –other variable bias like family size, it contracts even further. Consequently, they tell us that the elite school diploma is not the reason for a bigger pay check.

    I guess that takes us to Frank Bruni.

    In Frank Bruni’s recently published, Where You Go Is Not Who You’ll Be, he debunks the assumption that your college is your destiny. Looking at CEOs, psychology, incentive and a host of variables, he tells parents to stop pressuring their kids to get into an elite college. It’s not the college that counts; it’s the kid.

    Our Bottom Line: Human Capital

    More than the connection among earnings, success and elite colleges, our focus took me to the extensive requisites of valid research. Whether looking at the value of an elite school education, the merits of tuition free junior college or the signaling value of a diploma, forming a cause and effect connection for human capital formation is daunting.

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