$4 for a Can of Coke? Price Gouging Hits New Level

With the aftermath of Hurricane Sandy looming over the people in the hardest hit areas of the United States many people are finding price gouging is taking place.  With supply now less than demand in these areas store owners are raising their prices in order to maximize profits on the items they have available to sell to consumers.  Even though this is illegal in New York and New Jersey there are still examples of people charging as much as $4 for a can of Coke.

Are these store owners really doing an in justice to the people in their areas, this article argues the opposite.  If we did it the United States Government’s way there would be a run on the stores and the first people there would get to buy everything and then they would have to opportunity to horde or sell the extra goods at huge markups to individuals who still need them.  The way the store owners are doing it lowers the demand for goods, so people only buy the items they need to stay alive, allowing the stores to keep providing items of necessity to the masses.

When the Government sticks it nose into economics, shortages are created, people can starve or die of thirst because demand is greater than supply.  These regulations create riots and other unwholesome activities in order for people to survive.  But when the stores are allowed to apply basic economic principles to their stores everyone wins.  The stores make more money, the masses get the food and beverages they need, everyone may not be happy, but everyone is alive.  Why is it wrong for store owners to profit from managing their prices so that they can stay open and continue to provide essential goods to the people?


Reduction in Inputs = No Production and No Demand?

In the theoretical world of economics when inputs are reduced for a company they will benefit from  lower marginal costs and thus increase their production (Note: Inputs = Costs such as labor, rents, wages, taxes, etc.). It should also be noted that companies will typically produce at levels intended to meet demand and also build the required infrastructures to accommodate such production levels. However, this is not always the case.
Case in point: The Chevy Volt. The Chevy Volt is an electronic car from General Motors (GM). Based upon perceived demand for the Volt the US Government, along with local government entities in Michigan, helped reduce the inputs for a plant operated by LG Chem (South Korea). These governmental grants and tax breaks were intended to help make the production less expensive for the batteries of the Volt.
In 2010, the US Government gave a grant of $150 million to LG Chem to build the battery manufacturing facility. This was in addition to local tax breaks of $50 million in property taxes over the next 15 years and $2.5 million a year in business tax reductions. So, how much has the reduction of inputs help increase the production levels of Chevy Volt batteries at the LG Chem plant? Answer:  ZERO.
Why then if inputs where so drastically reduced by government subsidies has production remained flat lined? The simple answer: There is no real demand in the market right now for these electric vehicles. Some have even claimed that the technology now to store energy in batteries for these cars is no more effective than that of 100 years ago. Demand is so low that now after 2 years of setting up the facility and testing production that each employee receives a one week furlough each month (paid via Unemployment Benefits).
So, can anything be done to increase demand for these electric cars? Well, the government is offering to help consumers reduce the purchase price for the Volt, and other electric cars, via  Federal and State tax rebates. These rebates can combine to be as much as $12,500 off of the MSRP of over $40,000 when one purchases a new electric car. With many of these rebates originating in 2010 and many still existing today the demand has not really changed for the cars.
It seems like the government entities are doing all they can to increase the demand of these cars. They are willing to invest heavily in reducing the inputs of essential parts for manufacturing, thus making production costs as seemingly low as possible, and also offering consumers money, in the form of tax rebates, to purchase them.
Regardless of governmental intervention and incentives to both producers and consumers the demand is just not there. It appears, at this point, no matter how much the government wants to create demand for the Volt that the principle of Consumer Sovereignty is the real driving force in the lack of demand.

Monopoly on...us

As we are working on exercises concerning monopoly, this story on patenting human body caught my attention. Since the 1980 Supreme Court decision allowed for patenting of human-made microorganism, there has been a deluge of patents on our cells and genes by the pharmaceutical companies.

One of the story concerns John Moore, a cancer patient who has had cells extracted from his body, ostensibly for the cancer treatment he is receiving. What he wasn't told however, was that his cells could be enormously profitable as the basis of some next-generation pharmaceutical. However when he sued over the rights of his cells, the California Supreme sided with the University of California, the public school who employed the researcher that took his cells.

I can understand and even appreciate the need to give incentives to certain monopolies. Faced with enormous fixed costs in research and development, the government grants exclusive rights to companies with breakthrough patents to earn an economic profit over a number of years as to encourage research. However this practice has led to the unforeseen effect of using patents to exert exclusive control on genes, cells, and other biological material to prevent other companies from engaging in competing research. Economic profit and government patents now perversely stand in the way of new discoveries, not to mention the very scary slippery slope of patenting pieces of the very building blocks of people.

Counterfeiting Goods in China

China's counterfeit goods range from electronics to liquor; counterfeit goods have the brand but not the quality.  According to a recent article from ABC News, "Chinese counterfeiting now costs foreign firms an estimated $20 billion a year in lost profits."  It is quite apparent that the absence of copyright laws spurns from the communistic form of government and the view that what is perceived to be good is what is good for the majority rather than protecting individual rights.  Are there ways to protect the brand without instituting copyright laws?  Are there any societal benefits to counterfeit goods?  Do counterfeit goods provide benefits to the customer?  Practically speaking one would respond that yes there are benefits to the consumer as this must be the reason that the counterfeit goods are purchased.  As one analyzes the situation it is difficult to pin-point the benefit or benefits.   The following are a list of negative effects consumers face from purchasing counterfeit goods:  non-durable, poor quality goods, risk of exposure to toxic or contaminated materials, broken goods, goods that contain materials which are harmful to the environment or have caused harm to animals, deceptive advertising, and more.  Buyers face a huge risk since they do not fully know what they are buying.  Are there positive effects for the consumer?

A Viable Solution to Tuition Increases

The article titled, “To Lower College Tuition, Obama Should Focus on Supply and Demand” covers an interesting but simple solution. College tuition has been inflating over the years throughout the nation. President Obama has addressed this issue in some of his speeches at college campuses by threatening schools that if their tuition does not stop increasing, then taxpayer funding will go down. Though this position is likely just political gobbledygook to win support of college students and parents, there is a more practical solution to the issue. The solution involves supply and demand. Demand has grown for a college education. Some explanation of the demand growth can be found in population increases, increased foreign enrollment, and an under par economy with added financial aid. Supply of freshman slots available on campus has not kept up with the growth of demand. This lack of supply results in a shortage, which results in price increases. The solution is to expand the supply of freshman slots on campus. If President Obama or any other politician really wants to stop tuition increases, then they should put pressure on schools to increase the supply of freshman enrollment slots.


Political Rhetoric and Economic Policy: Should We Label China a Currency Manipulator?

Monday night’s presidential debate on foreign policy certainly gives voters some kernels of thought to chew on, and plenty of abstractions to lay their head down on at night. Among all the puns, one-liners and rhetoric was a comment from Governor Romney that caught my attention, “I will do what this administration should have done and label China a currency manipulator.” Even as I heard my ultra-conservative grandfather let out a war-whoop in support of Governor Romney and watched snarky tweets from my very liberal friends come through over the chatter I found myself thinking, “What exactly does that mean?”

It isn’t the first time the thought crossed my mind. After all, I recall President Obama promising to use all diplomatic means necessary against China, including this label, in 2008. I heard the same promise from President George W. Bush’s mouth in 2000 and 2004.  In fact, this very popular campaign promise from both sides of the aisle has always been one that caught my attention, and finally as a responsible voter (not the punk kid I was during those earlier elections) I decided to actually investigate this possibility further.  A recent article by Annie Lowery published in The New York Times provided a good place to start.

Global currency manipulation is an effort made by other countries in order to make their currency comparatively cheaper next to the US dollar. The promise most countries have made to avoid currency manipulation falls under the Article of Agreement of the International Monetary Fund. Even though the IMF and WTO supposedly prohibit these actions, there is little recourse taken against countries who routinely engage in manipulating their currency. There are several thoughts about  this.

First, manipulating currency to be cheaper makes the country’s exports cheaper, meaning that the US is more likely to import larger quantities of them. Secondly, some experts argue that by holding down their currency some governments are distorting capital flows by as much as 1.5 trillion dollars per year. That number translates into a net drain on the aggregate demand in the United States and the euro area. Millions of Americans and Europeans would likely be employed if countries did not manipulate their currency and instead worked to achieve more sustainable growth through encouraging higher domestic demand.  

The question then becomes, what would labeling China as a currency manipulator mean for the US economically? The answer ranges from not much to a trade-war doomsday. 

Let’s begin with the extreme. Labeling China as a currency manipulator opens the door for the US to place tariffs and other trade sanctions on Chinese imports. Of course, doing this may result in China imposing similar trade restrictions against the US, and, as Annie Lowery points out in her article, perhaps even tempt the country to deny contracts to American companies like General Electric and Boeing.

 This label could even hurt American jobs to a degree according to a report released by the Rhodium Group. The report cites that due to the recent surge in Chinese investment it can be estimated that majority-owned US affiliates of Chinese companies directly support approximately 27,000 jobs in the US today, a number that has increased by 17,000 from five years ago. Further, the report projects that by 2020 these Chinese firms will employ as many as 200,000 to 400,000 Americans.

Even if we disregard such projections and label China as a currency manipulator in an effort to save American jobs from moving overseas, and bring home those that already have, we have to ask ourselves what kind of jobs are we bringing home and do we really even want them back? In a US workforce that is trending more and more to the knowledge worker (who make up as much as 45 percent of the workforce according to some estimates), do assembly line and labor driven opportunities have a compelling place? 

I think it is more likely that other countries (some who are worse currency manipulators than China—i.e. Taiwan) would simply fill the vacuum that would open up if the US and China became pitted against one another in a trade war.

However, remember that this hypothetical trade war is our worse case scenario. What is more likely to happen if the US labels China a currency manipulator? Nothing. Again, unless the label is followed by tariff and economic sanctions, it does little but insult China. This insult, too, would seem to come at a strange time since China seems to recently be doing what the US has asked of it for years, strengthening their currency. Admittedly, China still only allows its currency to float under limits, but it is floating it nonetheless. It would seem that continued subtle, diplomatic pressure from whichever administration ultimately calls the White House home would be a better route to encouraging this positive trend than the use of the controversial label.

But labeling China as a currency manipulator sounds so much cooler and presidential, right? Which is probably why virtually every recent political candidate has promised to do so, yet never actually do. As far as political posturing goes, the idea is pretty effective, but in terms of economic policy it leaves plenty to be desired.   


Is the tablet market over-saturated?

What are we to think about the new tablet market now that we have the impending release of the Microsoft Surface as well as the anticipated release of the iPad Mini? The Surface is being released as the new and upcoming big competition for the iPad and at the same time the iPad mini is being released as competition for the smaller 7 inch tablets.
The question becomes whether or not the market has become over-saturated with this new product type? I don’t believe so. There are countless options of all shapes and sizes in the laptop and new ultrabook market. Why would the tablet market be any different? They are moving from being a consumer’s luxury want into a necessity. I believe that in the electronics market and computers in-particular necessitates many options. We will have the Surface that looks to be as close to a laptop as you can get and still be in the tablet category all the way down to the simplest of e-readers. The price point will range anywhere from $69 to nearly $900. That is something for everyone. The consumers are so diverse that the category must match in its product diversity and price. 


Will the iPad Mini cannibalize iPad and iPad Touch sales?

Apple recently announced the iPad Mini which has had mixed reviews from analysts.  The iPad Mini will have a 7.9-inch screen and will be priced at $329, compared to the regular 9.7-inch iPad that is priced at $499.  It is expected to compete against prodcuts like Amazon's Kindle Fire and Google's Nexus 7, which are similar in size but priced from $159 to $199.

Steve Jobs was opposed to a smaller version of the iPad and it will be interesting to see how the product does.  I don't expect the new product to create a shift in the overall demand of tablets, so which products is the iPad mini really competing against?  If Apple is trying to compete against the lower end products like the Kindle Fire and Nexus 7, why would they price it $130 to $170 more than those products? I agree with analyst Michael Walkley who stated, "While we believe these strong sales will come largely at the expense of Apple's competition, we concede iPad Mini will likely cannibalize iPad and iPod Touch sales."  If people can't afford the regular iPad at a price of $499, why would they pay $329 for the iPad Mini instead of getting the Kindle Fire for $159?  I think that the new product will draw more potential buyers away from the regular iPad than the Kindle Fire or Nexus 7. 


The ‘Mortal Enemy’ of Home Prices: Excess Housing Inventory

According to Gary Shilling an Economist, housing prices are still set to fall another 20%.  He states this even though the most Economists believe that the housing market is on an upswing.  The main reason for his belief in the housing market is the excess inventory still out there.  As we learn with supply and demand, when the supply goes up beyond demand, prices drop.  And with banks still holding on to huge amounts of foreclosure inventory, when they get released it will cause the housing market to drop.

“Shadow inventory refers to the number of distressed homes that have not yet been listed by a realtor but are expected to hit the market soon; a number of the properties are in the process of foreclosure or are seriously delinquent or behind with loan payments.”  In fact I know of people who are currently delinquent on their homes well over a year and still living mortgage and rent free in them. 

The banks are doing this, because if the foreclose on those properties, then they have two choices, put them on the market and over inflate it, in order to sell them at a discount price, foreclose and let the property sit empty and let nature damage it. 

This is why Shilling believes this increase is just a head fake because of the over 1.5 million excess available properties out there.  “He says speculators and investors are snapping up homes and hoping to flip them as a profit but new home owners "are the foundation of the market" he notes.”  And even with mortgage rates at near all-time record lows, there just are not enough new home owners out there.


Tablets are the new DVD

The demand and supply curve for tablets are moving to the right. They are seen as substitutes for personal computers for many people. In the article “Intel's outlook fails to inspire hopes for PC recovery,” the global decline in income, especially in Europe and China, has shown that PC’s have a big competitor in their marketplace.  The tablets are smaller than and almost as powerful as a personal computer.  You can watch your favorite TV shows, listen to the newest songs, or show photos from your recent trip. They also cost less and are much more portable and less cumbersome than a laptop computer.  In the fast pace of technological advancements, the time between leaps in technology is growing shorter and shorter. Perhaps one day soon the personal computer may go by the wayside, just like VCR tapes did ten years ago.  Some of you may not have even seen a VCR tape unless it was at the local DI store.  How soon will it be until the tower computer is only seen at thrift stores? 



Why are Americans spending so much on pets?

According to the 2011-2012 American Pet Products Association (APPA) National Pet Owners Survey 38.9 million U.S. households own a cat and 46.3 million U.S. households own a dog.  The numbers are even more staggering when broken down by the total number of pets owned: 86 million cats and 78 million dogs.  Pet ownership is costly; in 2011 $50.96 billion was spent on pet related expenditures. Only 4.2% of the $50.96 billion was related to live animal purchases.  The American Pet Products Association predicts that in 2012 $52.87 billion will be spent in on pet related expenditures. 

In considering these expenditures it is pertinent to review the market demand geographically.  Esri, a geographic information system (GIS) company, created the Canine Country map.  A map of the U.S. which displays the demand for dog treats.  The site also provides an interactive map for one to search within their state, territory, or zip code to see where the demand is highest.  Do You Live in Cat Country? and Do You Live in Canine Country?  color-code the demand for dog and cat treats.  Areas shaded dark brown are where dog and cat treats are in highest demand.

APPA has data beginning in 1994 where U.S. households spent $17 billion per year on pet related purchases.  The expenditures have steadily risen to the $50.96 billion spent in 2011.  How is that Americans are able to spend so much money on pets?  Why do Americans do this?  Do these households understand the opportunity costs?

Wal-Mart: Falling Prices and Instant Gratification

In a move to capture even more customers, and compete more directly with Amazon.com, Wal-Mart is beginning to test a Same-Day Delivery option for online shoppers. The goal is to make virtually all of Wal-Mart's products available to customers who order online within 4 hours at their doorstep (via UPS). This change in Wal-Mart represents not only a competitive threat to outside businesses, such as Amazon.com, but also an expansion in Wal-Mart's vertical and horizontal organizational boundaries.
Wal-Mart can claim its vertical boundary expansion to the fact that this new service continues to move Wal-Mart's activities closer to the consumer. While Wal-Mart has utilized its online presence to offer shopping, shipping and even ship-to-store options for customers it is now testing expanded user options. No longer do people have to check the famed "People of Wal-Mart" website to see if they got caught shopping in their pajamas or underwear, they can now shop within the privacy of their homes and still get the product the same day. The ability to receive a product the same day with even less effort expended on the customers behalf may even increase the purchase of impulse items.
The horizontal boundaries of Wal-Mart will also expand through the scale of their operations and with the potential to later include a scope expansion as well. Currently, Wal-Mart customers enjoy the options of shopping in the retail store, regular shipping from the online site and the widely used ship-to-store option. By adding  direct same-day shipping to your home Wal-Mart can expedite the time it takes to receive their goods and products. While Amazon.com has offered two-day shipping and very limited same-day, this Wal-Mart option evolves their already "Super Centers" into mini-distribution centers as well.
Same-day shipping is currently offered with limited products and in few locations. If the test goes well Wal-Mart expects to add same-day options to its 4,000 national retail locations. In addition to more stores offering same-day they will also offer more products in the same-day shipping extending the scope.
As a much larger provider of goods Wal-Mart has a competitive advantage over Amazon.com. Wal-Mart has the buying power to keep prices low and continually drive them lower and with its numerous retail locations Wal-Mart has the ability to distribute products same-day more efficiently. Although the details are not fully published this same-day shipping will be delivered through UPS. Wal-Mart also has the ability to forecast demand for same-day by using their already established ship-to-store order histories.
Only time will tell if the test is a success and Wal-Mart rolls out same-day shipping on a large scale or if the costs and logistics prove to be too much for Wal-Mart to manage. Regardless of the results it does show that even a retail super-giant such as Wal-Mart can continually evolve and extend both its vertical and horizontal boundaries.


The i-Stimulus

September chatter was all abuzz about a new economic stimulus—the i-stimulus. It isn't a boost handed down from the politicians, nor one that many talk-show pundits commented on, but it sure had various financial and economic organizations talking.

The Guardian,  Forbes and The New York Times all ran articles in mid-September touting the economic boost the US could expect following the release of the iPhone 5. The Telegraph even quoted former Federal Reserve governor Kevin Warsh saying, “The iPhone 5 is going to do more for the real economy than QE3.”

JP Morgan rallied around the idea, publishing an article that leads with this sentence:

"We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth."

The article goes on to say that based on the projected retail cost and previous retail trends, the trade-margins that figure into the US GDP resultant from iPhone 5 sales could boost the fourth quarter economy by $3.2 billion and the annual measure by as much $12.8 billion.

To JP Morgan’s credit, their numbers are sound. The math all adds up, and equals an exciting 0.33 percent figure that promises to boost the economy (0.33 percent is actually a lot considering that the total economic growth seen thus far this year is only about 2 percent). The problem, then, isn't in the numbers, it lies in JP Morgan’s logic. Something that JP Morgan initially seems to admit:

"This estimate seems fairly large, and for that reason should be treated skeptically."

And perhaps if they had stopped there we could give them the benefit of the doubt, but they continue:

"However, we think the recent evidence is consistent with this projection. The last iPhone launch was at a similar time last year. In October of last year, when the iPhone 4s first became widely available, overall retail sales that month significantly outperformed expectations….Given the iPhone 5 launch is expected to be much larger, we think the estimate mentioned in the first paragraph is reasonable."

The estimate, however, is only reasonable if we (like JP Morgan) assume that every single dollar people spend on the new iPhones would not otherwise be spent on something else throughout the remainder of the year. See the problem? Let me sketch it out with the following hypothetical.

Let’s say I want an iPhone 5—highly unlikely as I’m a Samsung Galaxy SIII guy myself, but remaining in our hypothetical situation, let’s say I actually do want an iPhone 5—now I must figure out a way to pay for it. If I’m like more than 43.1 percent of Americans who have extremely limited savings, odds are I’m not shelling out of my “rainy day” account for the iPhone 5. Rather, I’m going to cut spending elsewhere and reallocate the existing budget to pay for my new phone. 

It works like this, instead of taking my wife out to dinner on a Friday night, and then hitting up the latest movie we will stay home, eat Ramen and watch Prime Time. Instead of taking my daughter to Jumping Jack’s Bounce House Playland, I’ll take her to the free city park. Rather than get my secretary a poinsettia for the holidays, I’ll give her a 99 cent Wal-Mart card.

Taking all this into account, it becomes evident that my iPhone 5 purchase has done almost nothing for the economy. I've simply reallocated money I would have spent anyway.

In fact, other reports from early October seem to boost my argument. Check out the piece Business Insider ran titled, "The iPhone 5 is a likely culprit for bad retail sales last month." That headline pretty much sums it up, and lends even less credence to JP Morgan’s original projections. 

The utility of a real stimulus is that it gets capital to work in the economy that would otherwise sit stagnant, hiding in a bank somewhere. Even if iPhone 5 sales do pick up and provide some increase in the economy, the billions of dollars spent on the phones will most likely simply translate into more hours for Apple employees both domestic and abroad. There will be more work for the people who ship and deliver the product, and more work for the already overworked, underpaid, strike-prone Apple Chinese contractors. But if the money is most likely going to be spent anyway, wouldn't it be better spent closer to home? I think so, which is why I’m posting this quick analysis and then taking my daughter to play at Jumping Jack’s Bounce House Playland. 


Airlines fees testing elasticity of passenger demand

    In the article “Airlines fees testing elasticity of passenger demand” by Charlie Leocha the testing of elasticity of demand was described. It was very interesting for me to find out that it is better to look for lower additional fees rather than lower airfare. According to the article, every airline has a different structure for charging prices, such as charging the first-checked-bag fee. I do not believe that it is very smart to test the pricing intelligence of the US passengers as well as their price elasticity, because people can always figure that out and do more driving then flying.
     On the other hand, it is quite obvious that different customers pay different prices. For instance, I think that business travelers have an inelastic demand for tickets, because their time is pressed and slow transportation is not a good substitute for their need.
     However, if I look into the category of leisure travelers, I can state that they have an elastic demand. As a leisure traveler, I pay for my flight out of my family budget not business expenses, and that is why I am more sensitive to price.
     Finally, I would like to mention children’s discount. Children have more elastic demands than adults because parents are paying for children and that is considered low budget.
    Airlines understand the difference between the categories that I have described above, in terms of price elasticity of demand, and charge business travelers more for a ticket. Checking business airfares, I saw different restrictions that airlines placed on the lower-priced tickets, such as non-refundable tickets, unless you have made a 2-week advance purchase.
    In conclusion, I would like to ask everybody to be more aware of airline policies, because as customers we have to make right judgments in this travel world where airlines are engaged in price discrimination and are trying to raise the prices in order to see how much we are willing to pay to fly.