• Because of price controls, Venezuela has perverse incentives that create shortages, inflation and underutilized resources.

    Venezuela’s Biggest Economic Problem

    Oct 7 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Financial Markets, Government, Health Care, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 178 Views

    Last year, saying that a shortage of toilet paper was the reason, the Venezuelan government announced that troops would temporarily occupy a toilet paper factory and 50 million rolls would be imported “to calm the people.”

    Several weeks ago, Clorox said it would no longer produce bleach and other household products in its three Venezuelan factories. With the Venezuelan government mandating rock-bottom prices, they were leaving because of three years of losses.

    Meanwhile, Venezuela’s air travel problems are getting worse. In 2003, Hugo Chavez, (President/1999-2013), said airline tickets had to be purchased with Venezuelan money that the government would later exchange for an international carrier’s home currency. The plan though has not quite worked out. Owed approximately $3.5 billion dollars for their increasingly worthless bolivars, most airlines are now clamoring to get their money. Predictably, until then, Air Canada, Alitalia, American, Delta, United, Lufthansa and Iberia have either cut the number of flights or left Venezuela altogether. For Venezuelans, fewer flights mean another shortage and much higher fares. You can imagine also the convoluted itineraries that take people by bus to a neighboring country out of which they can fly.

    We could go on and on with tales of Venezuela’s economic woes. The one common thread is the huge cost created by artificially lower prices. There are shortages caused by more quantity demanded as prices drop, shortages from hoarding by sellers who hope the price will rise, and still more shortages because of buyers who then sell their wares on the black market and in nearby countries. Correspondingly, time is wasted as people try to locate goods and stand in line. It all adds up to a massive underutilization of resources and an annual inflation rate that is close to 60%. (It even adds up to a coffin shortage.)

    Our Bottom Line: Incentives

    Artificial prices create perverse incentives.

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  • Everyday economics, game theory and next day delivery

    Next Day Delivery and the Prisoner’s Dilemma

    Oct 6 • Behavioral Economics, Businesses, Economic History, Economic Thinkers, Households, Lifestyle, Thinking Economically • 199 Views

    Combine bad weather, shopper procrastination, and free overnight delivery guarantees and you get a UPS nightmare.

    Our story starts last December. Hoping to maximize volume and sneak in another sale day, stores like Macy’s promised overnight delivery on December 23rd. With 70 other retailers offering the same deal (for free sometimes), the results were calamitous. Approximately two million packages wound up in trucks rather than homes on Christmas Day.

    Retailers' prisoners' dilemma from delivery overload

    Consequently, UPS and FedEx are asking retailers to avoid the last day squeeze. Responding, Nordstrom moved its December 23rd order deadline for overnight shipping back three hours to noon. Already, Macy’s had a noon deadline and stuck with it.

    Not too much of a response? The reason is the prisoner’s dilemma.

    The Prisoner’s Dilemma

    Categorized as game theory, the prisoner’s dilemma could apply to two recently arrested home burglars. Separated when they reached the police station, each one knew the punishment for the crime would depend on who did or did not confess.

    Based on the diagram (below) of the prisoner’s dilemma, to minimize jail time, each has the incentive not to confess. However, denial could bring the longest jail time if the other person spills the beans. On the other hand, confessing could be a ticket out the door if the other burglar denies the crime. Psychological studies of the prisoner’s dilemma indicate the length of the sentence shapes the response. The longer the sentence for keeping quiet when one’s accomplice talks, the greater the tendency to confess.

    Retailers face the prisoner's dilemma


    So, isn’t Macy’s trying to predict what Nordstrom and other retailers will do? After all, one retailer cannot eliminate next day delivery just before Christmas unless everyone else does also. And, whether considering an arms race between nations or a host of other decisions that depend on what someone else does, you can see how the prisoner’s dilemma extends far beyond the marketplace.

    Our Bottom Line: How Firms Compete

    Next day delivery is a competitive strategy. With small firms and large ones, whether the market is oligopoly or monopolistic competition, what you think another firm will do shapes your behavior.

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  • everyday economics of college ranking

    The Problems With College Ranking

    Oct 5 • Behavioral Economics, Economic History, Education, Labor • 172 Views

    In their newest college scoreboard, U.S. News & World Report placed Princeton at the top, Harvard next, and Yale #3 for the best national universities. Next, I could not resist checking out the “Best Undergraduate Teaching” and found Princeton (#1), William and Mary (#2), and Miami U at Oxford (#3). As for business schools, the top three grad programs are at Harvard, Stanford and University of Pennsylvania’s Wharton.

    You can see below the national universities ranking for the past four years:

    Ranking human capital formation

    From: The Washington Post

    False Precision

    I wonder if we are dealing with false precision. After all, whether looking at colleges or best dressed movie stars or GDP, ranking has to be totally subjective. It all depends on the variables you select, their weight, how you quantify them, your time frame and much more. For the best undergraduate teaching schools, U.S. News & World Report just asked college presidents, deans and provosts. They called it a “peer assessment” survey.

    In an especially excellent 2005 Atlantic article, former Reed College president Colin Diver, detailed the impact of the U.S. News results. Summarizing the downside of ranking while explaining why Reed refused to participate in the process, he took me to a slew of unintended consequences that included an “irresistible pressure toward homogeneity” and the temptation to elevate scores by changing institutional procedures. Meanwhile, he marveled at the quantity of brochures he received from schools hoping to influence the reputational survey he completed annually when he did participate as the Dean of Penn Law.

    By contrast, other critics looked at the surveys themselves. In a 2011 New Yorker article, journalist Malcolm Gladwell showed how survey questions reflect the perspective of the designer and skew the results. Focusing on graduate business school ranking by five magazines, one Forbes writer perfectly illustrated how different questions generate varied results. In one example he explains that Forbes uses the financial gain of graduates after five years as a ranking variable for graduate business schools while U.S. News uses starting salaries. And yet both say they are determining which business school is best.

    Our Bottom Line: Human Capital

    Just like we add to physical capital with new machinery, human capital increases with more education. But where we can best increase our stock of human capital is not as easy to figure out.

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Marijuana to Multinationals

    Oct 4 • Behavioral Economics, Businesses, Developing Economies, Economic History, Government, Health Care, Households, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 120 Views

    Our Posts Roundup

    Everyday Economics on the gender gap Sunday 09.28.14

    Knowing When You are Most Creative…more

    Everyday economics and the benefits of city living Monday 09.29.14

    How to Decide if a City is A Good Place to Live…more

    Everyday economics and Increased demand, less physician supply and a price ceiling for Medicaid explain why we have network inadequacy. Tuesday 09.30.14

    The Reason it Could Take Longer to See a Doctor…more

    Everyday economics and Legalizing recreational pot in Colorado has provided another example of how tough it can be to do economic forecasting for taxes and GDP. Wednesday 10.01.14

    The Problems With Predicting Marijuana Tax Revenue…more

    The banks and insurance companies are financial intermediaries that avoid legal marijuana business. Thursday 10.02.14

    What Happens When a Bank Refuses to Take Your Money…more

    How global firms engage in monopolistic competition Friday 10.03.14

    When Big Multinationals Need to Act Small…more


    Economic Ideas Roundup

    • productivity
    • externalities
    • price ceilings
    • tax revenue
    • economic forecasting
    • financial intermediaries
    • monopolistic competition
    • international trade

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  • How global firms engage in monopolistic competition

    The Reason One Starbucks Can’t Ask Your Name

    Oct 3 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor, Lifestyle • 175 Views

    There is one Starbucks where they don’t ask your name when you order your drink. Rewards cards and phones are prohibited because they might store or convey information. Meanwhile baristas undergo security checks, can only say to friends that they work at a federal building, and have to report anyone who asks them too many questions. Not knowing names, one barista said she associates people’s faces with their drinks, like the “iced-white mocha woman.”

    According to the receipt, this Starbucks is Store #1 (my store is #20167) but some just call it the Stealthy Starbucks. And yes, its location is Langley, Virginia at the CIA headquarters.

    The Langley Starbucks is one example of how a global chain has to have a local link.

    Just opened in July, Starbucks’s first store in Colombia will sell only locally sourced beans. In Great Britain, recognizing people were happy to take their coffee and run, Starbucks needed more drive-throughs. The opposite was true in France where customers liked to “sit and sip” an espresso that tasted less “charred.” Responding, Starbucks added a blonde roast espresso to the menu and more seats.

    In China, Starbucks is catering to a tea-drinking culture where one customer said, “…the coffee is so bitter it tastes like Chinese medicine.” As a result, through drinks like Black Sesame Green Tea Frappucino, they obscure the coffee taste with milk, sugar and foam. Similarly, in India, Starbucks’s food offerings include the Reshmi Kebab Roll and spice infused Chai Tea Latte but also locally sourced coffee and a Classic Breakfast Chicken Sandwich.

    We should add though, that Starbucks India initially had problems going local as has Starbucks Australia.

    Our Bottom Line: Competition

    Even on a global scale, successful firms recognize what monopolistic competition requires.

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