• Everyday economics and the apple's monopolistic competition.

    How Honeycrisp is Similar to American Pharoah

    Jun 8 • Businesses, Demand, Supply, and Markets, Economic Humor, Environment, Innovation, Labor, Lifestyle, Tech, Thinking Economically • 174 Views

    At FreshDirect, organic Red Delicious apples are about $2.50 a pound while Honeycrisps are $5.23. The price difference is all about a brand.

    Where are we going? To the importance of brands and breeding.

    The Honeycrisp Story

    Described as “amazingly crunchy, incredibly juicy and sensationally sweet,” the Honeycrisp was developed at the University of Minnesota. David Bedford says creating a new apple took three decades of cross breeding. Imagine though when they took that first bite and knew they had a winner. The next step was to patent the seed and charge anyone who wanted to use it $1 a tree.

    Until the Honeycrisp, most apples looked enticing and tasted mushy. Like potatoes or onions, all Red Delicious apples were the same as were Golden Delicious and Macintosh. With no way to distinguish what he produced and a market that determined price, the farmer’s sole incentive was to keep cost low. Ultimately, that meant less taste and diminished consumption.

    When the Honeycrisp was patented in 1990, its taste and texture were different. Scientists said the reason was its unusually large cells. Now though, with the patent’s expiration, the Honeycrisp will attract more growers. As a result, price and quality could diminish.

    However, like American Pharoah, Honeycrisp breeders realized there was money to be made from her offspring. The result was SweeTango, the child of Honeycrisp and Zestar. And this time, the owners of the patent have permitted only 45 growers to reproduce their progeny.

    Our Bottom Line: Monopolistic Competition

    Traditionally a product of perfect competition, the apple had many growers who created identical fruit. As a result, the market determined the price. Once the Honeycrisp gave growers some product differentiation, they moved to the right on the competitive market structure continuum towards monopolistic competition. Having created a brand, Honeycrisp growers gained some price control.

    Monopolistic competition and the competitive market structure continuum.

    Moving to the right, firms increase their size and pricing power. Meanwhile market entry and exit become increasingly difficult.

    So, whether looking at breeding or branding, maybe Honeycrisp and American Pharoah are similar.

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  • Everyday economics and tennis externaities

    A New Spin For Tennis Economics

    Jun 7 • Businesses, Demand, Supply, and Markets, Labor, Sports, Thinking Economically • 124 Views

    Oracle founder Larry Ellison bought a tennis tournament and a tennis garden. Targeting millions toward facilities and prize money, he said it was time for the sport to have a comeback.

    Where are we going? To the externalities his purchase created.

    The Ellison Purchase

    In 2009 Ellison acquired the Indian Wells tennis tournament and facilities for $100 million. Included in the next $100 million he spent was a Hawk-Eye line calling system for every court, stands surrounding the practice court and an extra stadium that seats 8,000 to augment the 16,000 seats he already had. Further establishing the Indian Wells identify as an upscale venue, he added three restaurants and a celebrity venue to attract the rich and the famous (who then attract the not so rich and not so famous).

    His most controversial decision was to raise prize money totals to $11 million from $7 million. In the men’s 2012 competition, the top winners got a $400,000 increase. On the female side, the boost was $300,000. Far smaller, first round losers got less than a $1,000 increase.

    Just looking at this Indian Wells image, we can begin to understand why people have started to call it the fifth grand slam (after Australia, Paris, Wimbledon and the U.S. Open).

    Externalities from Ellison's tennis

    From: Bloomberg

    The Response

    Ellison quickly generated an owners’ reaction when he raised the prize money. While the Women’s Tennis Association (WTA) approved the increase, the Association of Tennis Professionals (ATP) was first tied, 5 to 5. Initially saying they could not afford an increase, the owners soon acquiesced.

    For the players, his pay increase exacerbated inequality. Tennis has always had an inequality problem and now it is worse. In 2013, the sport attracted 8874 men and 4862 women. The problem was that most spent more than they were paid.

    As you can see below, at the top, the money is big. (1-50 refers to ranking. Nominal or real is the dollar value.)

    Externalities of tennis player pay

    From: ITF

    Meanwhile among the lower ranked players, at a high of $20,000 or so, annual earnings are not nearly enough to cover travel, hotels, food, clothing, laundry and restringing,

    Externalities from unequal Tennis prize money

    From: ITF

    With Ellison’s injection of more prize money, the gap only gets bigger.

     

    Our Bottom Line: Externalities

    Perceiving an externality as a rippling impact, you can see that Larry Ellison is exerting pressure on other tournament owners to pay players more and improve their facilities. Meanwhile, for the players, his approach does little for the lesser ranked players, a crucial group because everyone starts there. Tennis does not want to lose talented individuals as they climb to the top because they cannot afford the process.

    Are Ellison’s externalities positive or negative? It depends.

     

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Height to Hamburgers

    Jun 6 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Environment, Financial Markets, Gender Issues, Government, Health Care, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 108 Views

    Our Posts Roundup

    Everyday economics for too many decisions Sunday 5.31.15

    What McDonald’s needs to know about choice fatigue… more

    Everyday economics for son preference Monday 6.01.15

    How son preference impacts height… more

    Everyday economics for hyperinflation Tuesday 6.02.15

    Why more means less in Venezuela… more

    Everyday economics and ownership in a market system Wednesday 6.03.15

    What Alexander Hamilton would say to Congress… more

    everyday economics and hunger impact Thursday 6.04.15

    How hunger affects shopping for shoes… more

     

    It's Tough To Solve the Poaching ProblemNeither the market nor a regulatory approach has solved the problem of poaching in Africa. Friday 6.05.15

    A different way to decrease poaching… more

    Ideas Roundup

    • behavioral economics
    • supply and demand
    • GDP
    • health care
    • gender issues
    • productivity
    • human capital
    • inflation
    • monetary policy
    • labor
    • price ceiling
    • contracts
    • tradeoffs
    • markets
    • consumer spending
    • environment
    • regulation.

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  • It's Tough To Solve the Poaching ProblemNeither the market nor a regulatory approach has solved the problem of poaching in Africa.

    A Poaching Problem that Regulation Hasn’t Solved

    Jun 5 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Environment, Government, International Trade and Finance, Labor, Regulation, Thinking Economically • 98 Views

    With China and Thailand a destination and Tanzania and Zanzibar their pipeline, the ivory trade is flourishing. One result? May fewer African elephants.

    Below you can see that the poaching numbers are high and elephant population numbers are down.

    Elephant conservation is failing as poaching increases

    From: National Geographic

    Where are we going? To the power of the market.

    Regulation

    On the surface, regulation makes sense. African nations can protect elephant sanctuaries, seize and destroy ivory, and everywhere in the world, ivory sales can become illegal,

    But it’s not that easy.

    The high price of ivory makes it very attractive. At the local level in developing African nations, you have poor villagers with little incentive to oppose poaching. On the national level you have corruption that incentivizes politicians. Furthermore, the cost of a regulatory structure has been estimated at $400 million.

    Market Problems

    Perhaps because you have to depend on the “invisible hand” rather than visible regulation, the market has been pretty much ignored. By looking at demand and supply, though, we can better identify the problems. On the demand side, one problem is inelasticity. Because the demand curve is almost vertical, when government seizures shift supply, price rises and the quantity demanded remains relatively constant. Meanwhile, when price rises, we incentivize more quantity supplied.

    Below, the supply shift elevates the equilibrium price.

    Conservation through the market.

    Our Bottom Line: Market Solutions

    By focusing on demand and supply, new solutions for wildlife conservation become apparent. It works, for example to create a “stigma effect.” In Western countries, new values about appropriate attire brought demand down for fur clothing. On the supply side, researchers are even suggesting more supply. Shifting the supply curve down pulls price down. A lower price makes poaching less attractive.

    There are many possibilities. With some regulation, we just have to harness the power of the market.

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  • everyday economics and hunger impact

    Why You Should Eat Before You Shop

    Jun 4 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Macroeconomic Measurement, Thinking Economically • 132 Views

    Economists usually assume that when we shop, our demand relates to price.

    But to hunger???

    Hunger Experiments

    Trying to determine the how hunger affects what we want and what we like, a research team got some surprising answers.

    1. Outside a department store that primarily sold nonfood items, they gathered data on what 81 shoppers bought and how happy and hungry they were. Using information from store receipts and a survey with a happiness and hunger scale, they concluded that people who were hungrier bought more, even though it was not food.

    2. Stopping 89 students who were either entering or leaving a cafe, researchers looked at each participant’s desire to acquire food and nonfood items or services and how much they liked the food and nonfood items or services. While the food answers were what we would expect (being hungry increased their wanting and liking), for nonfood, again the hungrier participants wanted more but interestingly they did not like those items more.

    These are the items they were asked about before or after eating:

    Demand can shift because of hunger.

    From:”Hunger promotes acquisition of nonfood objects”

    The entire study was composed of five different experiments. And even in the part that just involved paper clips, hungry people wanted to acquire more of them.

    Our Bottom Line: Change in Demand

    Rooted in logic, our demand changes in response to a list of determinants that includes income, taste, substitutes and complements. Now though, if we add hunger, the logic seems to evaporate. If we do not even like a good or a service more, why would hunger increase what we are willing to spend? We can ask a behavioral economist for some answers.

    Below you can see how hunger affects a demand curve.

    Change in demand

     

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