• Everyday economics and March Madness is about big business.

    Following the March Madness Money

    Mar 24 • Businesses, Demand, Supply, and Markets, Labor, Sports, Tech, Thinking Economically • 154 Views

    “Several years ago, it was decided to ‘seed’ the best players through the championship draw in handicap tournaments so that the players in each class shall be separated as far as possible one from another.”

    American Lawn Tennis, 13 January 1898

    And so began the first recognized use of “seed.” When you seed a tournament, you make sure the playoffs will flower by scattering the best teams in the early rounds and weeding out the weakest. As a result similar “seeds” do not compete against each other until the end. The March Madness seeds were scattered so that #1 Wisconsin could start against #16 Coastal Carolina and #1 Duke played #16 Robert Morris.

    The seeding pattern enables a team to earn a unit for every game it plays except for the championship match. A team that makes it to the championship match usually gets five units. And that takes us directly to March Madness money.

    Where are we going? To the business side of March Madness.

    Following the Money

    The Teams

    $255,379 will be paid per unit by the NCAA to a team’s conference in 2015. If a conference has many winning teams, it receives more units than a less successful conference. The value of those units are then shared among all of the teams in the conference.

    The Coaches

    • $1 million plus paid to 35 college basketball coaches in 2014.
    • At $9.7 million, Duke’s head coach Mike Krzyzewski is at the top.
    • 30 percent of Division I athletic spending went to coaches and staff.

    The NCAA

    • $900 million in revenue from broadcast rights, “corporate partners,” tickets.
    Incentives from March Madness NCAA revenue

    From: NCAA

     

    You and me:

    • $9 billion (estimates vary considerably) in bracket bets.
    • $1.9 billion of unpaid or unproductive work time because 77.7 millions workers will have watched or been distracted by March Madness.
    • 94 million chicken wings purchased during 2014 March Madness.
    • 15 million hours related to March Madness on digital devices.

    CBS and Turner Broadcasting

    • $10.8 billion paid to NCAA for 14-year broadcast rights deal.
    • $1.5 million received per 30 second ad in 2014 (Super Bowl 2015 equivalent was $4.5 billion.)
    • $1 billion plus in ad revenue totals.

    Colleges:

    Basketball revenue varies considerably.

    The top:

    Incentives differ among NCAA March Madness school for dollar support.

    The bottom:

    Incentives different for March Madness bottom five.

     Our Bottom Line: Big Business

    Looking at the massive spending and revenue that relate to the NCAA, the teams, schools and coaches, the media and many of us, we can characterize March Madness as big business.

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  • Everyday economics and Free trade agreements make Mexico an attractive place for car makers.

    The Surprising Reason Your Car Was Made in Mexico

    Mar 23 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 182 Views

    If you drive a Honda Odyssey, it was assembled in Talladega County, Alabama and is #3 on the 2014 American Made Index. This Japanese auto is ranked near the top of the list because it was assembled in the U.S., it has substantial U.S. sales, and more than 75 percent of its parts were made in the U.S.

    Alabama though has a problem.

    The Allure of Free Trade

    Mexico is attracting a growing number of auto factories. This map says why:

    Mexico's free trade pacts attract auto makers

    From: WSJ

    With more than 40 free trade agreements, Mexico can say to car makers,  “We will save you money.” For BMW, that would mean avoiding a $5,000 duty on a $50,000 car sent from Spartanburg, South Carolina to Europe. By contrast, that 10 percent duty for U.S. made cars is zero for Mexico.

    As a result, car manufacturers are building new factories in Mexico while in the U.S. they prefer to expand what already exists. Yes, Spartanburg will enjoy a $1 billion investment as BMW expands its sport utility plant there.  But for a new plant, BMW chose Mexico.

    So, for Mexico, think cheaper labor, improving logistics and free trade to explain why Mexico is attracting auto investment from Nissan, Honda, Mazda, Audi, and Mercedes. Add to that a NAFTA (North American Free Trade Agreement) perk that any car made with more than 62.5 percent parts and labor from North America can ship tariff free to anywhere in North America.

    Free trade lures car plants to Mexico.

    Those new car plants are boosting Mexico’s rank among the world’s biggest car producers:

    Free trade helps Mexico with autos.

    Our Bottom Line: Comparative Advantage

    Nineteenth century economist David Ricardo (1772-1823) would have given Mexican free trade policy a high five. One of the first people to explain the principle of comparative advantage, he said, “Trade, trade, trade,” because each nation then can do what it does best (where it has the comparative advantage) and the whole world benefits through greater efficiency.

     

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  • Everyday economics and temptation bundling.

    How Temptation Bundling Can Help You Exercise More

    Mar 22 • Behavioral Economics, Health Care, Lifestyle, Thinking Economically • 178 Views

    To encourage a distasteful but desirable activity like eating less or exercising more, a behavioral economist would suggest a commitment device.

    Here are some commitment devices:

    Cost and benefit for commitment devices

    From: “Commitment Devices: Using Initiatives to Change Behavior”

    Where are we going: To a closer look at one commitment device.

    Temptation Bundling

    Most mornings, I walk four miles and listen to podcasts or books. Because I want to listen to an interesting podcast or a junky book and I should exercise daily, I am temptation bundling. When you temptation bundle, “wants” and “shoulds” are combined.

    But does it really work?

    Researchers from Penn and Harvard took a close look at temptation bundling at a university campus gym by dividing a group of volunteers into three groups. Everyone in the first group was given an iPod loaded with tempting page turner novels that could be accessed only when at the gym. Also receiving the iPods with the books, the second group of participants was encouraged to restrict their listening to the gym but not required to do so. The third group, acting as the control, got iPods, a $25 Barnes & Noble gift certificate, a sample workout and a reminder that exercising is good for your health.

    The results confirmed most of the researchers expectations. Group 1’s workouts exceeded the control group by 51 percent and for Group 2, 29 percent more. So yes, temptation bundling did increase the frequency of the undesirable activity—the “should.” But, after a temporary break for Thanksgiving, its impact for all groups diminished precipitously.

    Our Bottom Line: Cost and Benefit

    Temptation bundling is a commitment device that lowers cost and increases benefit. One way to explain the temptation bundling phenomenon is that the cost (guilt) from a “want” goes down while the benefit from a “should” goes up. The result, shown below, is more utility.

    Cost and benefit analysis for temptation bundling

    From: “Holding the Hunger Games Hostage at the Gym: An Evaluation of Temptation Bundling”

     

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Shopping More to Driving Less

    Mar 21 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, fiscal policy, Government, Macroeconomic Measurement, Regulation, Tech, Thinking Economically • 122 Views

    Our Posts Roundup

    Everyday economics and airline flight decisions Sunday 3.15.15

    The real reason your flight was canceled…more

    Everyday economics and fiscal policy and the debt ceiling Monday 3.16.15

    Why the debt ceiling matters…more

    Everyday economics and the cost of snow Tuesday 3.17.15

    What we spend on snow days…more

    Everyday economics, new iPhones and conspicuous consumption. Wednesday 3.18.15

    Wondering why we buy new iPhones…more

    Everyday economics and seeing why parts of the Social Security program work, we can better grasp why so many government programs fail. Thursday 3.19.15

    Deciding if government can be better…more

     

    Everyday economics on self-driving cars Friday 3.20.15

    The revolution from self-driving cars…more

     

    Ideas Roundup

    • tradeoffs
    • opportunity cost
    • cost and benefit
    • debt ceiling
    • fiscal policy
    • gross national product (GDP)
    • productivity
    • creative destruction
    • planned obsolescence
    • conspicuous consumption
    • entitlements
    • regulation
    • autonomous vehicles
    • innovation

     

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  • Everyday economics on self-driving cars

    How the Driverless Car is About More Than Driving

    Mar 20 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Innovation, Labor, Lifestyle, Regulation, Thinking Economically • 153 Views

    In his recent TED talk, Google’s Director of Self-Driving Cars, Chris Urmson explained, “In 1885 Carl Benz invented the automobile. A year later, he took it out for a test drive, true story, and promptly crashed it into a wall.”

    You can see where Urmson is going. With drivers currently primarily causing 93 percent of all crashes for the reasons that are listed below, we need a self-driving car.

    Self-driving vehicles is the innovation that solves crash problems

    From: Eno Center for Transportation

    Where are we going? To why the self-driving car is a good example of contemporary innovation.

    The Self-Driving Car

    In this video, the gentleman behind the wheel is legally blind. A pleasure to watch, the video makes it easy to forget just how many industries would change if autonomous vehicles multiplied.

    If 90 percent of all vehicles were autonomous, the efficiency improvements and health benefits could be massive. One transportation think tank estimates that we could save 724 million gallons of gasoline, 2772 million hours and 21,700 lives. While we could question the numbers, we could not dispute that because self-driving cars accelerate evenly and “chain” on highways (perhaps even using their cooperative cruise control), congestion diminishes. They also eliminate the need to search for parking spaces, to use urban parking lots and perhaps even to have our cars remain idle 95 percent of the time. Sharing, we might not even have to own cars anymore. And we have not even touched the probable impact on freight transportation.

    So massive a change though, is bound to have countless intended and unintended consequences. For starters we can think of the auto industry, insurance and parking lots. With smaller cars, shared cars and more sophisticated technology, existing manufacturing “recipes” will be transformed. Similarly, the insurance industry would experience less demand for their traditional auto products and have to develop new ones. As for urban parking lots, they might gradually disappear as demand diminished.

    Our Bottom Line: Innovation Threads

    The changes that autonomous vehicles will bring to us are not unique. One commentator at a Goldman Sachs Innovation Symposium cited threads that contemporary innovation in many areas share:

    • Data enables us to personalize and customize.
    • Recent innovation is actually a synergy emerging from existing technologies.
    • Existing capital investment constrains change.
    • Software is driving innovation.
    • New technology is eliminating old jobs.

    With transformative technologies like autonomous vehicles replacing a resistant status quo, aren’t we back again to Joseph Schumpeter’s creative destruction?

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