Tag Archives: monopolistic competition

05.21.2013 | Monopolistic Competition: Marijuana Markets

As marijuana becomes increasingly legal, what kind of a market do we want?

At the moment, Colorado and Washington permit the production, sale and consumption of recreational marijuana and 18 states say the sale of marijuana for medical use is okay. But meanwhile, “federal law prohibits the cultivation, distribution and possession of marijuana.”

As a result, there are multiple marijuana markets in the United States. We even have marijuana arbitrageurs. Cheap in California and expensive in NY, the marijuana that is grown for medicinal use on the West coast can be sold in the East for a handsome profit.

Now, let’s take the next step. Assuming that marijuana becomes legal throughout the US, what needs to be resolved?

One concern is market structure and how to create monopolistic competition. With many sellers on the supply side and many buyers creating demand, monopolistic competition lets the market determine price and quantity. By contrast, if a less competitive oligopolistic market develops, several large firms would have disproportionate power. Targeting potentially heavy marijuana users, they could encourage excessive and unhealthy consumption.

A second issue is regulation. On the supply side, quality and safety need to be assured. Labeling needs to be accurate. For marijuana, we are not only talking about a smokable plant but also products like ice cream, candies, brownies and lozenges.

Finally, what about taxes? Colorado and Washington have been wrestling with the size of a sales tax. Too high and you could get a black market. Too low, and not enough revenue. Almost 2 weeks ago, the Colorado legislature approved an effective rate of 21.2%–more than the beer tax and less than cigarettes. Here are the specifics:

Colorado Marijuana Taxes (if approved by the governor and a popular vote)

Colorado Marijuana Taxes From Quartz (Taxes still have to be approved by governor and citizens)

Our bottom line? Because market structures create incentives for sellers and buyers, legislators can shape the impact of legalized marijuana.

Sources and Resources: The articles on marijuana markets are fascinating. The NY Times had this Op-Ed, Quartz focused on taxes (and the source of my cost data), this past econlife post links to some wonderful discussions, and here is a “Marijuana Arbitrage” podcast from NPR’s Planet Money. You might also want to see what the Congressional Research Service says about marijuana.

Posted by: adminEcon
Tags: Colorado, legalizing marijuana, monopolistic competition, oligopoly
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04.19.2013 | Monopolistic Competition: Cupcakes

The year was 2009, the GDP was sinking and unemployment soared to 10.1%. And yet, cupcakeries were proliferating.

Why? And why now, with the economy far healthier and the consumer far happier, are gourmet cupcake sales down?

Let’s start in 2009 with one cupcake entrepreneur who said a $3.00 cupcake cost her $2.45 to make.

ingredients: 60 cents
labor: 48 cents
packaging and merchant fees: 18 cents
marketing: 24 cents
mortgage payments, utilities: 57 cents
loan repayment: 16 cents
insurance: 4 cents
miscellaneous: 18 cents

She also needed $300,000 to purchase her 1400 sq. ft. store, got a $50,000 loan, and used $62,500 to set up and equip her storefront.

In a 2009 news article, a businessman predicted that cupcake stores would replace the ice cream store. Correspondingly, one market research firm cited a ripple of store openings beyond the “cupcake meccas” of NY and LA in Austn, Tex., Denver and Boston.

Fast forward to 2013.

Headlines shouted that the gourmet cupcake business was crumbling. Their example was Crumbs. The cupcake chain that was publicly owned and listed on Nasdaq as CRMB, Crumbs, went public during 2011. With the stock reflecting the trajectory of the business, during 2011 it hit a high just above $13.00 a share and now the stock is close to $1.30.

What happened? Sales are down. According to the firm, some stores were affected by Hurricane Sandy and there is more competition from individual bakers who can easily enter the market. In addition, one analyst cited “gourmet-cupcake burnout.”

Sounds like the cupcake business is coping with monopolistic competition. On the supply side we have lots of small businesses, easy market entry and exit, little freedom to determine prices. Add diminished demand and you can see the problem.

Sources and Resources: Displaying Crumbs’ and gourmet cupcake history, this 2009 article (and the source of my expenses list), this one from 2011 and a current analysis provide the details.

Posted by: adminEcon
Tags: demand and supply, factors of production, gourmet cupcakes, monopolistic competition
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03.22.2013 | The Tragedy of the Commons: Improving Your Reputation

A small group of New Jersey winemakers has a problem. No one knows that they blend a gourmet product.

After all, say, “New Jersey” and no one thinks vineyard. Most New Jersey wine, with strong hints of blueberries, raspberries or cranberries is best on ice cream. How then to distinguish the good stuff from everyone else’s?

An economist would say that your plight resembles the tragedy of the commons. Wonderfully described by economics Nobel Prize laureate Elinor Ostrom, the tragedy of the commons prevails when people destroy a common resource by overusing it. In a pasture, pursuing their individual interest, farmers tend to overgraze their animals. In a workplace refrigerator, we create a mess. What’s good for one is catastrophic when everyone does it.

Ostrom explained, though, that people can transform the tragedy of the commons into a solvable problem of the commons. Realizing it is in their best interest to create “collective action,” farmers voluntarily implement rules that preserve the pasture.

Although usually, the tragedy of the commons is associated with abusing common resources like our air, our water and the refrigerator we share at work, NJ fine wine makers face a similar situation. Voluntarily, they too need to cooperate because their common reputation has been abused. Through “collective action” they can disassociate themselves from the NJ commons that is associated with low quality. And that is precisely what they have done. Rebranding their region, fine wine makers in NJ have established the Outer Coastal Plain Vineyard Association. If they can get consumers to associate O.C.P. with fine wine, then, they can enter the field in which Napa Valley and French wines dwell.

Sources and Resources: I first started thinking about NJ wines and the tragedy of the commons after reading a NY Times Magazine article from Planet Money’s Adam Davidson. It returned me to Elinor Ostrom and this great podcast interview after she won her Nobel. I especially recommend the podcast because Dr. Ostom recently died and she was a very interesting lady.

Posted by: adminEcon
Tags: collective action, Elinor Ostrom, monopolistic competition, tragedy of the commons
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02.11.2013 | Gender Issues: Sexism Sells

By Lilli DeBode, guest blogger, senior at Kent Place School

Basically everyone saw this commercial. And if you didn’t see it, consider yourself lucky. You were one of the few who were spared the experience of uncomfortably squirming around your couch, accidentally kicking a plate of nachos off of the coffee table in the process, whilst trying to shield your eyes and cover your ears simultaneously, and then possibly screaming around the seventh second of the commercial in the attempt to purge your body of this terrible spectacle that has befallen before your poor eyes (at least that’s what I experienced). Overly dramatic? I think not.

If you have not yet figured out what I am talking about, I am referring to the scarring Go Daddy commercial that aired a week ago on the Super Bowl. Yes, the one with supermodel, Bar Rafaeli and some random archetypal nerd making out, close up with high def. cameras and sound (oh, so much sound).

After their smushed together faces finally left my TV screen, (and after I was finished screaming) I was left speechless. “That was possibly the single most sexist thing I have ever seen” I said in a stupor to my mother who was crouching next to me, picking up the nachos that had flown across the room when my foot struck them a few seconds beforehand. How could anyone actually think that this commercial was a good idea? The whole basis of the ad was that Go Daddy has succeeded in combining brains and beauty, (two traits that usually don’t mix) and to demonstrate this, they needed a beautiful woman and a nerdy man. I could delve into why that commercial was so wrong on so many levels, but I can’t analyze it any better than they do in this article so let’s skip into the economics of this… shall we say… mistake?

It costs approximately 3.8 million dollars for a 30 second ad on Super Bowl Sunday. About 108 million people watched that night, and since then, more than 10 million people have watched the ad on YouTube. Sure, if its publicity Go Daddy was looking for, they certainly got what they wanted. After all, if you only have thirty seconds to make a lasting impression on millions of people, you’re going to have to do something risky. Although Go Daddy definitely did something extreme, they did it at the expense of half of all their viewers. Another minor fact that may have slipped Go Daddy’s mind is that the people who are going to use GoDaddy.com are not 13-year old boys.

Of course this was not the first time blatant sexism was used in a Super Bowl ad. It seems that every year there are at least four or five exceedingly offensive ones, but what will it take for these companies to realize that misogyny is not really selling like it used to. Today, women control about 75% of consumer spending, so maybe instead of insulting more than half of the world’s population, next year we could see more from Amy Poehler or the talking E-Trade babies. One can only hope.

I do leave you with this one plea though: For the sake of all women—no—all decent human beings, please never support Go Daddy by giving them your business.

Sources and Resources: This Forbes article is very interesting and it talks about five of 2013′s worst commercials. CNN’s article also discusses the commercial, focusing on the twitter feedback (#notbuyingit by Miss Representation) Go Daddy received.

Posted by: adminEcon
Tags: competition, gender stereotypes, GoDaddy.com, monopolistic competition, sexism, Super Bowl commercials
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01.13.2013 | Competition: How Do Cups Affect Our Taste?

I don’t quite understand why Dunkin’ Donuts and Starbucks use white cups.

Sensory researchers have concluded that the color of the cup affects our taste perception. When 57 participants were asked to rate hot chocolate on several sensory scales, their responses appeared to depend on the color of the cup (see below). Saying the hot chocolate in an orange cup was the most chocolatey, tasters thought the hot chocolate in a white cup was least likable.

In other ways too, what we see affects what we taste. Drinks seemed sweeter in pink cups and 7 UP tasted more lemony in yellower cans. In one fascinating experiment, when researchers added red dye to white wine, tasters detected prunes and chocolate and other flavors associated with red wine. Similarly, when an orange flavored drink was colored green, people inaccurately described its taste.

Competing in a monopolistically competitive market, Starbucks and Dunkin’ Donuts have to distinguish themselves from many other firms selling the same drinks. Do they know that the white cup lost the flavor tests?

Results of the Hot Chocolate Taste Tests

Sources and Resources: For more about how the color of the cup influences our taste buds, this paper provides details and was the source of my graphs. I also recommend this article on “The Multisensory Perception of Taste.”

Posted by: adminEcon
Tags: competitive market structure, Dunkin' Donuts, monopolistic competition, product differentiation, Starbucks
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