Tag Archives: Wal-Mart

05.18.2013 | The Prisoners’ Dilemma: Outsourcing Factory Safety

Why do H&M and Gap disagree?

While European retailers like H&M (biggest Bangladesh garment buyer), Benetton, Marks & Spencer and Carrefour will act to together to elevate Bangladesh factory safety standards, US firms like Gap, Wal-Mart, J.C. Penney and Target are each acting alone. Why?

Sounds like retailers are facing the prisoners’ dilemma.

Picture for a moment 2 (guilty) suspects. Questioned by the police, each one can confess or remain silent. When one confesses and the other does not, the talker gets a less severe sentence. If both are silent, then they are released; if both confess, then they get equal jail time.

And therein lies the dilemma. Do you base your decision on what you think the other individual will do? The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions. Whether looking at disarmament negotiations, Democrats and Republicans, or H&M and Gap, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

So yes, retailers have compelling ethical incentives to elevate safety standards in Bangladesh. However, because an ethical strategy coincides with profit considerations, each one’s decision is all about competition and the prisoners’ dilemma.

Sources and Resources: This Washington Post article provides good background on how retailers disagree about elevating factory safety and here is the 6 page agreement that most US firms are not signing. For more on the prisoners’ dilemma at econlife, you might enjoy posts on OPEC, Congress, Ivy League schools and World Cup soccer. Please note that this post includes some excerpts from previous posts on the prisoners’ dilemma.

Posted by: adminEcon
Tags: game theory, oligopoly, outsourcing, prisoners' dilemma, Wal-Mart, worker safety
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10.24.2012 | Big Macs and Currency Manipulators

In China, a Big Mac costs close to the equivalent of $2.44. That same burger in the US is $4.20. The basic idea is PPP, purchasing power parity. The dollar can buy more when the yuan is undervalued. And President Obama and Governor Romney have both indicated that an undervalued yuan displeases them.

Actually, they probably would not mind if price fluctuated naturally in foreign currency markets. Instead though, they say currency manipulation might be occurring because a government is intentionally, over a long time period, affecting the demand for and/or supply of its money. And by impacting demand and/or supply, they are shaping its price.

China, though, is not the only one. We could add to the list, Denmark, Hong Kong, Israel, Japan, Singapore, Taiwan, Korea, Switzerland, Argentina, Bolivia, Malaysia, Philippines, Thailand, Angola, Algeria, Libya, Saudi Arabia, Azerbaijan, Russia. Some overvalue and others undervalue. But all, according to the Peterson Institute, are engaging in “currency manipulation.”

Finally though, I wonder whether currency “manipulation” is necessarily bad. One position says, “Yes.” An undervalued foreign currency lowers US demand for US made goods and destroys US jobs. The other side says that consumers and businesses that purchase Chinese goods benefit from their artificially low prices. Because consumers have extra money to spend elsewhere, jobs are created. In addition, businesses that buy Chinese metals and motors, for example, have lower costs.

Sources and Resources: To check out the PPP of other currencies, you might enjoy the Big Mac Index and also an econlife PPP explanation. For all the detail you could ever want about currency manipulation from many viewpoints, this Peterson Institute paper, this Treasury Department report and this Mark Perry blog are ideal complements.

Posted by: adminEcon
Tags: Big Mac Index, China, consumers, currency manipulator, demand, foreign currency markets, Governor Romney, job creation, overvalue currency, Peterson Institute, President Obama, supply, tariffs, The Economist, undervalue currency, unemployment, Wal-Mart, WTO
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10.12.2012 | The Supreme Court, Starbucks and Human Capital

Saying affirmative action was the reason she was rejected from the University of Texas, Abigail Fisher sued. The University responded that it was okay for race to be a part of their admissions process. And Starbucks, Wal-Mart and 55 other prominent US corporations agreed.

On October 10, the Supreme Court heard the arguments.

For some brief background, we can go to 2003 when the Supreme Court referred to the landmark 1978 Bakke case. Permitting race as one of many criteria for college admissions but prohibiting minority quotas, both decisions said that diversity was a valid goal.

Although the case is about education, in a “friend of the court” brief, 57 businesses said they too cared about diversity. As one law professor explained, ”They are looking at the pipeline,…And the university represents their pipeline for building out their workforce.”

In addition to colleges and corporations, the case also takes us to economic growth. Looking at how nations should assess diversity, a soon to be published paper from economists at Williams College and Brown University said there is a connection between genetic diversity and national income. Using the US as one example, their conclusion says balance rather than too much diversity or too much homogeneity is optimal.

Our bottom line: Isn’t all of this about developing the human capital that we need to fuel our GDP?

Sources and Resources: My reading about how Fisher v. University of Texas connected to the business community began with this Marketplace.org report, and then continued with the brief businesses submitted to the Supreme Court and a Washington Post summary of and quote from the case. Meanwhile, a marginalrevolution.com post, a Nature article and the 2 researchers’ paper provided a perfect summary of genetic diversity issues–a topic that is generating considerable controversy.

Posted by: adminEcon
Tags: affirmative action, Bakke, economic growth, Fisher v. University of Texas, GDP, genetic diversity, Grutter, human capital, Starbucks, Supreme Court, Wal-Mart
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03.31.2011 | Gender Matters

For years, female musicians said that they were being treated unfairly. The problem, they claimed, was audition bias. Many more men were selected for orchestras than women. The response was that the men were better. A Harvard and Princeton study found, though, that when an audition was gender blind, many more women were selected.

This takes us to Wal-Mart. Currently being heard by the Supreme Court, Wal-Mart v. Dukes involves a class-action suit in which Wal-Mart is accused of over-promoting men and underpaying women. However, before a trial court can decide whether discrimination occurred, the Supreme Court has to say whether a class-action suit can represent the 1.6 million women who have worked for Wal-Mart since 1998.

Commenting in Court, Justice Ruth Bader Ginsburg said that it was not “at all complicated…Most people prefer themselves. And so a decision-maker, all other things being equal, would prefer someone who looked like him.” The result? “Gender bias could ‘creep’ into the workplace.”

The Economic Lesson

For us, the key here is human capital. For an economy to grow and thrive optimally, the factors of production, land, labor, and capital, need to be appropriately allocated. When there is gender bias, women’s talents are underutilized and the entire economy suffers.

For an orchestra, we need the best musicians. Now, our court system needs to decide whether Wal-Mart promoted and paid its best people.

Posted by: adminEcon
Tags: class-action suit, gender bias, human capital, production possibilities frontiers, Supreme Court, Wal-Mart
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11.18.2010 | Yuan Opinions

Can you imagine 43 million pairs of socks a year, 5,000 an hour, some saying Dora the Explorer, being produced by one Chinese manufacturer? When you pay $2.99 for a pair of those socks at Wal-Mart, they probably cost that Chinese manufacturer, Shuangjin Knitting and Textile, 25 cents to make. The Chinese firm then sells its socks to U.S. distributors like PS Brands, the largest importer of Chinese socks. Finally, retailers like Wal-Mart, Disney and Adidas buy the socks from PS Brands.

Moving in the opposite direction, complex electronic components are sent from the U.S. to China. Staco Systems, a small California firm, exports its aerospace components to Chinese factories. On the retail side, Apple considers China a market for its iPods and iPads as do General Motors and Ford for their cars.

The Economic Lesson

This takes us to the pressure the U.S. is placing on China to stop undervaluing its currency. Whether looking at Wal-Mart and Apple or you and me, China’s response will have very real consequences. But the consequences vary.

A more expensive yuan in relation to the dollar could narrow PS Brands’ profit margins and make retail sock prices rise. But also, it could increase business for Staco Systems and other U.S. exporters. We might find manufacturers transferring businesses from China to other, more cost effective developing nations. Large firms could locate in China to avoid foreign exchange. And all of that is only the beginning of a worldwide ripple responding to the yuan’s ascending value.

To what extent is the yuan undervalued? You can look at the Big Mac Index.

Posted by: adminEcon
Tags: apple, China, exports, foreign exchange, imports, Wal-Mart, yuan
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