Monopoly: What an ugly word!

Why does the word “monopoly” result in such aversion in an average person? Is it because monopolies are “bad”? Surely monopolies only exist to make as much money as possible, right? Think of some of the examples of monopolies (or near monopolies) in our history: AT&T, Standard Oil, US Steel, your local energy company, De Beers, MLB, NFL, etc.  Even oligopolies invite collusive agreements.

Yet, being a monopoly doesn't mean that they are always profitable. The real reason that monopolies are so “bad”, most economists argue, is that monopolies reduce consumer surplus and, therefore, overall economic welfare.

So what do we do about it? Our answer to everything in the United States is to regulate ourselves to death. We pass antitrust regulations. We increase corporate tax to penalize these companies for making lots of money.

Except that increasing taxes and regulation decreases economic output and chases corporations away from states or even countries. Some people have gone too far and have used regulations to limit competition, interfering with potentially good mergers. Think of some possible mergers that could have resulted in a positive economic benefit (especially consider vertical mergers): United Airlines & US Air, Staples & Office Depot, and GE & Honeywell.

Regulation doesn't always lead to the death of monopolies, though. In fact, many monopolies (or near monopolies) are supported by government regulation. Think about the government’s support for agricultural prices, public utilities, or the post office.

So what is the alternative to monopolies? How do we prevent them from occurring? How do we control them? Do we have to? Should we just force public ownership on these companies if they don’t guarantee perfect competition or something like it?


Online Education

I found this article discussing online education's potential in today's higher education system after talking about the topic with a friend. He was considering taking a job with an online university who offered to pay for his graduate degree if he received it from that university.
Web-based education is becoming a popular option for students. It seems like I can't watch a game on TV without seeing advertisements for ten different online schools. While they may be increasing in popularity, I believe employers prefer to see a candidate with a degree from a school like SUU or BYU rather than from the University of Phoenix or Broadview University. The author of this article defines these offerings, made for a variety commitment and ability levels as "Massive Open Online Courses" (MOOCs).

However, universities such as ASU and even Harvard are implementing online classes to aid incoming freshmen as well as to expand their student body. The difference between online universities and ASU/Harvard is the course organization. "Small Private Online Courses" (SPOCs) are designed for elite students and require them to complete a heavy load of homework. By increasing course quality using online systems, these schools can cut costs without diluting quality.

The costs associated with running an institution of higher education are massive due to the construction and maintenance of buildings, failed matriculation, and payroll. By using the internet as a classroom, universities can mitigate these costs. ASU has increased the number of students graduating in four years from one-third to one-half with hopes of continuing this incline.

After looking closer at the job offer, my friend realized that the school was privately accredited and decided to get his degree from an AACSB accredited institution. ASU and other schools are combining the reputation of an accredited institution with the convenience and cost-efficiency of online programs to offer students less expensive alternatives to in-class instruction.


The Potential Move of the Sate Penitentiary

There is a major debate happening in the Utah Legislature. In 2014 the legislature voted for moving the Utah State Penitentiary. Since the legislature voted to move the penitentiary, the public has involved their opinions starting protest groups. There are a few potential move sites that include Tooele County and next to the Salt Lake International Airport. From the beginning, legislatures have wanted to move the penitentiary to a site that will not have to deal with encroachment from all sides, so they have looked to find build sites near lakes, mountains, and uninhabitable land.

If the legislature successfully moves the state penitentiary, Rep. Brad Wilson believes that the old site for the penitentiary will become a booming business center with 680 acres to develop, creating about 40,000 jobs and bringing about 1.8 billion dollars into the future economy. If the legislature decides to keep the penitentiary in the same place the renovations will cost about 250 million dollars to properly update the current prison or 1 billion dollars to build a new one.

There are multiple economic benefits and costs. The cost, of course, of building the new 1 billion dollar structure will cause Utahn's to see a rise in their taxes immediately, and lasting for at least 20 years. There is also the cost to the current employees of the penitentiary, if the structure is moved the potential commute will increase the amount of gas the average employee uses. This will also cause more inversion with more commuting. One more cost is the value of the land surrounding the new site of the penitentiary, the value will decrease because, being located next to a prison is not a favorable attribute when building housing developments. The benefit of moving the penitentiary is that the structure will become safer to work at, because the current structure is not correctly built for the purpose it is being used for. The potential for a 1.8 billion dollar economic boost with high paying jobs is a major economic benefit for any business in the surrounding area. This will create a growing economy and an increase in cash flows in business surrounding the potential business site. By moving the site to a strategically well planned area there will be new businesses willing to build next to the prison which will include, most importantly, hotels and restaurants. People in  the state penitentiary have visitors and those visitors will need a place to stay while they travel.

I am curious to hear your opinion on this topic of moving or renovating the current prison and whether or not the taxes are worth it?




Capitalism and entrepreneurship

I have some great friends who are currently working extremely hard in a software startup business. Recently, we got to talking about their product and how it will be used, and by whom.  I couldn’t help but notice how many times the phrases “our customers”, “the feedback we got”, “the market this”, “the market that” were uttered.  We were talking about what life was like as entrepreneurs, and expressed how exciting it must be to create something valuable. He mentioned an instance that happened to him recently, where he was perceived as “greedy” because he and his partner have decided to make a living in this way. It never really occurred to me in this way before, but as I was thinking about it, that statement is almost exactly right AND exactly wrong.
Capitalism creates a group of people, like my buddies working on this startup, who have no choice but to concern themselves with the needs and desires of others.  These people are called customers. Responding to these customers wants is the very opposite of greed.

In an economic sense, greed could be interpreted as the immediate consumption of goods and services. I grab what I can without regard for others. Entrepreneurs survive longer by saving, or forgoing this immediate consumption, in order to achieve long-term goals. Often it takes months, sometimes many years to bring a new product or service to market.

Also, I have learned much about an entrepreneurs need to collaborate with others. They build teams and collaborate within them as they bring a product to market.  In designing the actual product, they are focusing not on their own needs, but the needs of others.  

So, what entrepreneurs do when they seek profit is far more than self-interest. You could say that profit is a measure of how well a company has served others. Under capitalism, a business prospers only if customers voluntarily pay for what you are offering. And it's only by improving its service to others that a business can thrive and grow. If an entrepreneur pursues his own interests first and his customers' interests second, their business will fail. And sooner or later an entrepreneur who does it the other way around will surpass him.

Of course, self-interest is involved. But the genius of capitalism is that it channels self-interest into altruism. Entrepreneurs can only help themselves by helping others. My buddies who are working hard and starting this business have made great sacrifices, both personally and financially. In many ways, what they are doing is much less glamorous than it is often thought to be.  I think entrepreneurs should be credited, thanked and held in high esteem because ultimately it is their selflessness that is the catalyst to bringing the best inventions and products to the market for everyone to enjoy.
The unintentional consequences of Obamacare

The Affordable Care Act, better known as Obamacare, was designed with the intention of offering better and more opportunities for individuals to obtain health insurance. The debate of whether we should be forced to have health insurance is not the topic of this blog, but rather has Obamacare truly allowed for better and more opportunities to obtain health insurance.

The legislation has opened the door for more companies to offer health insurance, which satisfies the more side of the equation. However, more is not always better, and it sometimes can make things worse. These new entrants will decrease the price of the most basic plans for consumers which would appear to be a positive outcome from the legislation. 

For simplicity, lets say that there are two different types of people that did not have health insurance before Obamacare. Individuals who did not want insurance and individuals who could not afford insurance. The individuals who did not want insurance, mainly due to the idea that they will not use it now, are most likely to choose the most basic plan at the most affordable price. Individuals who could not previously afford insurance are most likely to choose a plan that best fits their needs, which may or may not be basic. 

This situation leads to a 'I do not want to pay for it until I need it' type of attitude which goes against the reasoning of having insurance. Insurance is a type of community coffer where everyone contributes in case they may need to use it some time in the future. Healthy individuals, who do not think they need insurance, are paying for it now in case they may become unhealthy at some future point in time. This article discusses that in order to avoid the unwillingness of individuals to pay their portion into the community coffer the health exchange should be built with an oligopoly market. Yes, the prices for basic insurance would be higher, but so would the quality. When it comes to insurance I believe that quality is much more important than price.

Hershey Blocks Cadbury Imports

US consumers can no longer purchase imported Cadbury chocolates, and the “loyalists” of the brand are upset. In the article, “How Cadbury lost the right to sell its own chocolate inthe US,” we learn that, to protect its products, Hershey forced a ban on imported UK confectionary. Consumers quoted in the article “Hershey’s lawsuit sparks British revolt for ‘superior’Cadbury chocolate,” believe the company only pushed the lawsuit because it couldn’t compete with the imported sweets. While this group of consumers is dismayed by the ban, author Bill Saporito reminds us in the article “Quit Whining,Brits! Hershey Had Every Right to Block ‘Real’ Cadbury Bars,” that “Hershey owns the rights to manufacture Cadbury’s products in the U.S.Whereas Hershey competes in an oligopolistic industry, company decision makers may have believed that the ban would lead to an increase in market share for their products. However, the “loyalists” to the imported goods do not view Hershey’s Cadbury products as substitutes. Imported Cadbury is to the chocolate industry as Apple is to the technology industry, so an increase in market share for Hershey’s products is not likely. The “loyalists” to the imported Cadbury brand didn’t think much of the Hershey company to begin with, but now there is a tangible dislike that could lead to a boycott of the company’s products. How do you think the ban will affect the Hershey company?


MBA: Costs and Benefits. Is the Degree Worth It?

As I sit at my computer at 11:10 PM, after having completed our ECON 6200 "Pre-Built " online assignment for chapter nine,  I wonder if the benefits of an MBA exceed the costs of an MBA.   The benefits, as I see them, are a higher salary,  sense of accomplishment,  and a gateway degree to a doctorate degree in business.  The costs, as I see them, are actual tuition costs and time forgone that I could spend with family or pursuing other interests.  Add to the mix: SUU is not a top-tier business school that  will not command top salaries (see this link for some crazy graduating MBA salaries: Show Me the Money) upon graduation, but still a solid AACSB accredited state university.  

So, is all of the time, effort, and money really going to translate into a higher salary?  The good news is, after doing a little research,  the MBA program appears to be worth the cost, time, and effort. An article in Forbes provides insight into that answer: MBA Pay.  There is only one problem with the article: the data Forbes based their article on came from only the top fifty business schools. Data on non-top fifty business schools is scant, but I did find one good article:  Looking Up.  Do you feel the insights provided by the articles mentioned can generally be transferred to our MBA experience here at SUU? How about for MBA graduates who have come directly from an undergraduate degree into the MBA program without any job experience in between undergraduate and graduate studies? 


Could Life be Explained by Game Theory?

While searching through multiple articles, I found this one from Science News . I wasn't planning on writing about it, but then I realized, this is a great "real life" example of the information from chapter 10 of our textbook, so it might be of interest if you want to understand game theory a little better.

Game theory did not originally stem from economics, rather it came from math. It was decades after the first game theory equation that John Nash applied it to multi-player "relevant" scenarios. Nash Equilibrium moved game theory into the public eye since it now could be relevant in psychology, politics, and economics. Eventually game theory was a tool biologists began to use to explain evolution, and chemists can even use it to describe chemical reactions.

Chemically speaking, elements tend to form / gather in their most stable configuration, by using the least amount of energy possible. They do this all the time, if you were to put hydrogen atoms and oxygen atoms together you will get water H2O... 100% of the time. You wont get H3O. Due to the formation of H2O, the molecules are now more stable and can conserve more energy. There is no propensity to cheat, or bias to behave a certain way, an atom / chemicals can be thought to behave rationally. Because of this rationality, chemical reactions lead to equilibrium. While this example may seem irrelevant to our economic study of game theory, it isn't. This is a real example of how atoms compete and cooperate with each other to accomplish their individual goals of becoming more stable. On a side note, this equilibrium is maintained without collusion or the need of a punishment strategy, even if it is a one-shot or infinitely repeated game.

Moving to biochemistry some proteins can change / alter their rigidity or flexibility depending on their environment. This biochemical strategy is similar to a business strategy in which businesses control their pollution levels depending on the eco-conscious levels of their consumers. Further studying of biochemical game theory could lead to increased medical advancements by being able to alter the strategies they use to promote health.

This topic continues to be popular in science because it is a method to base scientific reasoning's on to help us paint a better picture of where we come from. I think the above items are enough to peak interest in reading more about this topic, or in the very least help shed new light on how game theory can be applied to other topics rather then economics.

Here are several other websites that discuss these strategies further and also some interesting others.


Sales Tax Loophole and a Local Business

I received an email from a client of mine asking me how to respond to his situation.  He runs a local brick and mortar store with products that range from a few dollars to around $10,000.  He received an email from a customer saying that the customer would save $260 in sales tax by purchasing a product from an online dealer rather than my client’s store.  This gives the online store a competitive advantage.  My client said he receives similar emails weekly.  He is forced to make a deal for specific customers or lose their business because they are the rational utility maximizing online consumers.  His customers are indifferent to the products and realize that they can have the same utility from a product that they can buy cheaper online than the one at his store. 
The products my client sells are homogeneous with other products.  The exact same products are available elsewhere.  The way that my client can differentiate himself from the internet is by having classes in his store, which still does not differentiate his main product.     Before the internet, my client had somewhat of an oligopoly market in Utah, his store being the largest of few that could compete.  With the internet, not only does he have to compete with more firms, but he has to deal with the advantage that the government has given others on the internet.

For years, politicians have been prodded by brick and mortar store owners to level the playing field for them in terms of sales tax (Reuters).  There are laws for citizens to report use tax on their individual income tax returns but few do, and auditing individuals for this purpose would be next to impossible while privacy laws exist.  So, the way the current laws are written, the government has given an advantage to stores that sell without sales tax.  This gives my client these managerial options: Reduce profit margin to compete with online stores or lose customers with a lowest price no matter what ideology.


Should the Federal Reserve Play Mind Games to Stimulate the Economy?

The Federal Reserve has two jobs: maintain the value of the dollar and maximize employment. In a very interesting article from the NY Times , the author Adam Davidson points out that Janet Yellen, who is currently in charge of setting the interest rates at the Reserve, has been maintaining the dollars’ value so well that it is actually impeding the development of new jobs. US citizens have become so comfortable in the stable value of their money that they are less likely to take the risks that coincide with the creation of jobs such as entrepreneurship and venture capitalism. Adam Posen, the man who once set the interest rates for the Bank of England, stated that if Janet Yellen were to simply suggest that the long run interest levels may be higher than previously considered acceptable she might scare people into investing their money in riskier ways to ensure they can beat the inflation curve, thereby creating more jobs.

Giffen goods, items that result in a rightward shift in demand as the price increases, were mentioned in an earlier post. My understanding of Giffen goods in lay-mans terms is that they are items that people are willing to pay or do more to obtain as the price increases. Giffen goods tend to be durable commodities, items that we use regularly that can be bought in advance and saved for later. Based on the information above, would it be appropriate to categorize the US dollar itself as a Giffen good? As interest rates rise, the cost of each dollar also rises. To offset its devaluation, people want more dollars and more willing to take part in riskier investments to gain them.

I would like to know your thoughts on whether the Giffen good concept applies to the US dollar and whether you think the suggestion made by Adam Posen is a good idea.


Comcast Horizontal Merger

On February 13, 2014 Comcast announced their intention to merge with Time Warner Cable.  The proposed merger would be a “friendly, stock-for-stock transaction”, where Comcast will procure 100% of Time Werner Cable’s 284.9 million shares, “amounting to approximately $45.2 billion in equity value”.  According to Freepress.net the proposed merger would create, “an Internet and cable juggernaut with unmatched power to crush the competition and hike prices for consumers”, giving Comcast a one-third control in the Internet and cable industry.  The Federal Communications Commission (FCC) has yet to approve the merger. 

This type of merger is a considered a horizontal merger between the two largest companies in the Internet and cable industry.  Comcast will need to show the FCC that the proposed merger will benefit consumers, reducing the price that they currently pay for Internet and cable services while not limiting their choice in providers.