Chapter 17 Reflection

1. What do you think about anti-trust laws with respect to the cell-phone industry?  Do you think the cell phone industry could be an oligopoly? Why or why not?

2. Take a few moments to explain how a decision box works.  What about Oligopolies is most unclear to you?

                I think that anti-trust laws are important to regulate the cell phone industry just as they are for all other oligopolistic enterprises.  If anti-trust laws were not in place this would allow AT&T to have a monopolistic hold on the cell phone industry.  According to a press release on the Department of Justice’s website (31 Aug. 2011), their position holds as “the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.”

                The one example of a controversial business practice that relates to cell phones is tying.  This practice is one of three from our text that anti-trust laws can regulate.  When Apple introduced the cell phone they had a type of software installed on the phone that only made it possible for the phones to use AT&T’s network.  A federal and state lawsuit ensued claiming violation of anti-trust laws.  Since then iphone’s have become available on networks such as Verizon, Sprint, T-Mobile, StraightTalk, Net10 and others I’m sure I’m not aware of. 

                Since anti-trust laws are in pursuit of curbing monopoly power, I think it is important for cell phone companies to be regulated since some to the disadvantages of monopolistic power are higher prices, restriction of other new innovative products to the market, reduction in economic welfare and fewer consumer choices.  Personally, I just got my first iphone in Dec. 2013 and live in a place where AT&T coverage is non-existent.  If it weren’t available on the Verizon network, I’d never had had the opportunity to use an iphone.

                In regards to the cell phone industry as an oligopoly, I think it already does exist as one.  AT&T, Sprint, Verizon and T-Mobile currently control almost 90% of the country’s cell service market.  To answer this question in respect to a monopoly, the answer would be no.  Just like the antitrust suits Microsoft has faced as far as integrating their Internet browser into their operating system was dismissed because it would have created too much market power, the same would be true if the government allowed AT&T to purchase T-Mobile or any other carrier.

                A decision box is used in game theory.  Our text defines game theory as “the study of how people behave in strategic situations.”  When a situation calls for strategic thinking, people use the information they have to design the best possible plan to reach their objective.  Game theory is sort of a version of a cost-benefit analysis one would use to make a decision.  The only real difference is that game theory, as specific to oligopolistic competition, encompasses decisions that are interdependent among the other firms.  A decision box is the illustrative expression of such a process. 

                What is most unclear to me about oligopolies is collusion.  Under what circumstances is collusion illegal?  In a certain sense is it just frowned upon?  Why is price-fixing illegal to even mention in conversation?  Wouldn’t there have to be evidential support to get someone in trouble?

Chapter 16 Reflection

     The way I think about it, advertising limits the amount of competition a monopoly faces.  Through advertising efforts, a company has the ability to convince potential byers that their product is better and / or different from that of its competitor (product differentiation). If they succeed in doing so, they will be able to charge a higher price and also limit what their competitors sell.  I think this would be less and less so in the case of oligopolies and fair markets.  I consider pricing to be a form of advertising, and if the goal of marketing is to communicate to potential buyers the value of a firm’s product, then selling it for a certain price point is indicative of that goal.  For example, I know that I have been in retail pursuit of certain things that I may not be very familiar with, e.g. electronic goods and end up buying an item that may not be the most expensive, but also not the least expensive.  I usually choose the middle price point.  If I only have two choices for a certain good, I will probably choose the more expensive as long as the marginal cost is not too great.

          The effectiveness of advertising also has to be taken into consideration.  For example, any money spent of advertising should, hopefully increase gains in revenue.  If a certain marketing technique is clever and turns out to be worth the money because it increases sales, then it makes the cost worthwhile.  On the other hand, if a marketing technique fails to entice or attract customers, then that leaves room for the competition to fill the void.  Good advertising limits competition; poor advertising invites competition.  Advertising is not cheap, not to mention instrumental in the promotion of a good, thereby placing it as a priority in the marketing of a product. 

          The most interesting thing I learned in this chapter was about price discrimination.  Just as by any other kind of discrimination, it sounds like a bad thing.  However, in regards to maximizing profits, it seems like the logical thing to do especially in the given example in our text.  Selling books to two different groups with two different interest levels in the material may not sound fair, but if marketing shows that the die-hard fan base is willing to spend more for a copy – it makes sense to charge what they are willing to pay.  The most interesting outcome of price discrimination is that it actually increases economic welfare.  The Australian buyers, who would have initially been excluded from buying the book due to too high of a price are included when price discrimination is in effect, thus letting them enjoy the book.  This seems to be a win-win situation for consumers and producers.

Chapter 9 Reflection

What was your opinion about restrictions on international trade before reading this chapter?  Have you changed your mind? Strengthened your opinion? In what ways and why?  What was the most interesting part of the chapter to you?  Why?

Prior to reading this chapter, I thought that restrictions on international trade were a bad thing.  The idea that any countries would not be able to trade with others and experience the benefits of a greater variety of goods, lower costs through economies of scale and increased competition led me to believe that any restrictions on international trade would cause both producers and consumers to be at a disadvantage.  However, chapter 9 makes very clear that you need to take into consideration the changes in total surplus and what effect that has on trade.  My opinion of this was strengthened by the two respective conclusions of importing and exporting that when trade is allowed, although one party (consumer, producer) is better off, no matter who is worse off, the benefits exceed the drawbacks thereby making it beneficial for society as a whole.  In light of this new understanding I still think that restrictions on international trade are a bad thing, only now for a completely different reason.  This is a good example of what was most interesting in not only this chapter, but economics as a field of study so far, which is a greater understanding of economic concepts that dismiss some seemingly logical perspectives. 

Chapter 8 Reflection

1. How important do you think the concept of a deadweight loss to taxation is?  Why or why not?
2. Should politicians and other taxing authorities consider DWL when making their decisions?

The concept of a deadweight loss to taxation is very important.  As the text explains, the welfare of both consumers and producers falls because when a tax is imposed because buyers buy less, as the good becomes more expensive and producers sell less as it becomes more expensive to produce the good.  These acts combined reduce total surplus.  Furthermore, it not only reduces total surplus, but does so at the expense of superseding the total revenue raised for the government.  I think it is extremely important to take this into consideration when voting for excise tax increases because if you only operate from the perspective that the tax gains are beneficial in some way (federally or locally) it wouldn't be a well-rounded decision on the individual level.  One may not realize the adverse effects it has on their own personal economic welfare.

Politicians should absolutely consider the deadweight tax loss when making their decisions.  Although initially tax revenue increases, will begin to decrease if the tax becomes too large.  I enjoyed learning why this is because without doing so logic may lead you to believe that the larger the tax, the larger the tax revenue, but as the text explains this is not the case.  Since the DWL of a tax is the area of a triangle computed by the square of its size, the DWL rises exponentially is response to the size of the tax.  An overzealous politician or one that is more concerned with equality than efficiency may choose to implement a tax increase that ultimately compromises the economic welfare of society as a whole.

Efficiency

Efficiency is the economic idea that output cannot be maximized beyond what it is without increasing the number of inputs.  "The most bang for your buck", if you will.  When taking into consideration a free market economy there are two ideas that contribute to whether or not resources are being allocated efficiently - consumer/producer surplus and market failure.  Consumer surplus is a buyer's willingness to pay minus what they actually pay for a good.  Similarly, producer surplus is what a seller is paid minus what it cost to produce a good.  Resources are considered efficient when the sum of consumer and producer surplus is maximized.  In more practical terms, producers who sell a good at the highest price possible are going to yield the smallest amount demanded by buyers thereby not being very efficient.  Sellers in this situation basically have produced too much with very few people willing to buy.  In contrast, producers who sell their good at the lowest possible price are going to yield the greatest amount demanded, thereby by maximizing the total amount of producer surplus and becoming most efficient.  Relatedly, goods will be sold to buyers who either value the good the most and/or have the greatest willingness to pay.  Both of these resource allocations lead to market efficiency.

In contrast, market failure - which can be characterized by market power and externalities - are the forces that prevent markets from existing efficiently.  Market power is the idea that a small group, or perhaps just one producer is the driving force behind market prices due to not having any competition.  For example, say Sony was the only manufacturer of TV's and for this reason charged as much as it costs for a car to purchase a television.  This act would disrupt the otherwise natural equilibrium of supply and demand of TV's.  No one is going to want to nor be able to afford a Sony television making the market for TV's inefficient.  The other disruptive force of efficiency are externalities.  These are influences beyond either the producer or consumers control.  They are not things taken into consideration on either side when deciding how much to purchase or how much to manufacture.  As a result of these unforeseen influences, it  can alter the equilibrium of what is in the best interest of all people affected, again making the market inefficient.

Module 1

1.  Should the minimum wage be increased annually at the rate of inflation? (Or alternatively, to $15.00) 

(2013) 1.6% 2.0% 1.5% 1.1% 1.4% 1.8% 2.0% 1.5% 1.2% 1.0% 1.2% 1.5% 1.5%(avg.)

(2012) 2.9% 2.9% 2.7% 2.3% 1.7% 1.7% 1.4% 1.7% 2.0% 2.2% 1.8% 1.7% 2.1%(avg.)

I took a statistical approach to answering this question and believe that the minimum wage should be increased annually at the rate of inflation.  The above percentages show inflation rates for each month over the last two years, with the last value representing the average, according to the Bureau of Labor Statistics.  For example, take the average inflation rate for 2013.  The minimum wage for both years is $7.25/hr.  For the minimum wage to have been increased at the rate of inflation would have equaled .11 raising the rate to $7.36/hr. and .04 raising the rate to $7.40/hr., respectively.  If we look at a greater number of historical inflation rates as well as minimum wage rates we can statistically determine whether increasing the minimum wage at the rate of inflation has either a significant or negligible effect.  Taking into consideration the last ten years (2003-2013), the minimum wage has increased three times: starting at $5.15 from ’03-’06 to (1) $5.85 in ’07, to (2) $6.55 in ’08 then to (3)$7.25 from ’09-’13.  The overall wage increase was $2.07 ($7.25-$5.30) and the average inflation rate was 2.78%.  Although there was a steady increase in the minimum wage, the average inflation rate over the last ten years was neither higher nor lower than any value by a large standard deviation.  This leads me to believe that as long as inflation rates fluctuate, which they certainly always will, it will offset by how much the minimum wage will rise.  Opponents of this issue say raising the minimum wage will not reduce poverty, but I believe that the greater an increase of the cost of living, the more money people will recirculate into the marketplace, thereby increasing demand as well as supply – leading to the favorable equilibrium price.  To answer the question more specifically, though, I think the increase of the minimum wage at the rate of inflation has a relatively negligible effect on the government (or the state, if their price floor differs from the government) to really be of much consequence to them while increasing the purchasing power of the working class (as long as inflation rates don’t get too high).

2.  Should a tax be imposed on "Cadillac" health insurance plans?

                In a word, no.  If in 2014 it became mandatory for all individuals to purchase health insurance, I am inclined to think that those who did not have it before and did choose to get it this year are those people who opted to get low-premium, high deductible plans.  You can think of this as people trying to do what they are told, but at the same time doing the least they can to be in compliance, since mainly so many people disagree with the mandate.  If a person opts for a “Cadillac” health plan that covers conditions that lesser plans have always denied like mental health, travel consults (deeming them not medically necessary) they are still putting more money into the pool to help even out the costs for everyone else, as I think is the goal of Obamacare.  I suppose opponents would argue that like higher tax rates for the wealthy, it would make sense to tax the policy holders or employers of more expensive plans.  Also, if a person is able to purchase a “Cadillac” plan when they could easily get away with a less expensive plan, but choose to do it anyway – why should they be burdened with a tax?  I believe there are many individuals who whether they are engaged in high-risk activities, have many family dependents or for employers with a disproportionately older work force, according to the United Health Care website, should not be penalized with an excise tax.  I think the key to lowering medical cost does not lie in excise taxes or public mandates, but rather to focus on cost control of services.  There should not be such a variance of cost from one facility to another if you need to get an MRI done or have your appendix removed.   Our text also states that when the supply curve is elastic (supplier = insurance company) and is elastic because their supply doesn’t change much based on the change in price of policies and the demand curve is inelastic (buyer = policyholders) because their demand doesn’t change significantly due to changes in price – most people want health coverage, the price received by sellers falls only slightly while the price paid by buyers rises substantially.  As a consequence the buyers take on most of the burden.

3.  Should the Federal government impose a price ceiling on essential items such as bottled water during an emergency such as Hurricane Sandy?

                Yes.  This is no more complicated than to be explained by the concept of fairness.  According to a Sept. 13, 2013 article in the Denver Post “Colorado floods: Price-gouging not illegal during emergencies” law enforcement said as long as consumers agreed upon a price there was nothing illegal about price-gouging, except when it came to prescription drugs.  According to the Colorado Assistant Attorney, as long as there is full disclosure it is not considered a scam.  Who cares?  Ethically and morally it is reprehensible for suppliers to increase their prices so as to exclude certain buyers from being able to purchase if they can’t afford the product.  As long as the government doesn’t impose a price ceiling that is below the equilibrium price, creating a shortage and forcing the sellers to ration their goods; a price ceiling that is not binding would control the cost and make it illegal to take advantage of people in such dire circumstances.  Opponents take the position of it being entrepreneurial and in theory does undermine our free-market economy, but from the same article, a University of Denver finance professor said “"There's no economic justification for the increase in price when the supply can come back," he said, "It's a huge issue in the finance and business world, of a company's social responsibility, of being a good corporate citizen.

Chapter 6 Reflection

In April there was a flurry of blog posts from economists on price controls and inflation in Venezuela.

 Read this article from the Times: http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?_r=1 and this post from Cafe Hayek: http://cafehayek.com/2012/04/but-hes-our-leader-exploiting-our-economic-ignorance.html. (If this doesn't open see below).

 How does this relate to the theories from the chapter?

                The concept of price floors can be exemplified from this article in the way of coffee.  The text defines a price floor as a legal minimum on the price at which a good can be sold.  If only a few years ago Venezuela was an exporter of coffee and now finds itself importing the good, you would have to stop and ask yourself, why?  The article goes on to explain that since government price controls have set the retail price for coffee so low that it is below what it costs for farmers to grow it; therefore, practically eliminating the incentive to do so. 

                The text states that when the government imposes a price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce good among the large number of potential buyers.  “Rationing mechanisms” are shown by the article in the way of long lines and people not being able to buy the most basic goods like toilet paper and cooking oil.  These items in a free market are rationed in relationship to their price which occurs through the process of equilibrium.  Venezuela, however operates in a capitalist economy.  The article demonstrates this when it says that the government has taken private ownership of dairy and coffee companies stating “it is in the national interest” to do so.

 

Now consider a different case.  After Hurricane Katrina speculators brought in bottled water, but charged quite a lot for it.  What might have happened had price controls been imposed?  Where does the concept of fairness fit into this theory?

                If a price control had been imposed on bottled water for victims of Hurricane Katrina they would not have been as expensive as they were.  According to my Google search, bottles of water were selling for roughly $7 per bottle.  Anyone who buys it at the store or the gas station during non-disaster times probably pays around $1.  I can only imagine that there were price gougers who charged even more due to the magnitude of Katrina.  Under different circumstances I may have considered this entrepreneurial, however taking into consideration the scale of this catastrophe this is an example of people taking remarkable advantage of others in the most dire of times.  No one is more in need of water than someone else during a time like that, therefore it is certainly unfair to only sell it at such an inflated price to only those who are either able and/or willing to purchase it.  Speculators do nothing more than try to gain a quick advantage from the anticipated increase in the demand of a good.