You Tube Ecolanguage

These URLs were passed on to me from my AP Listserve. They are excellent. If you have time to watch economics expressed as symbols, you'll be more prepared for econ in the fall. In no particular order: http://youtube.com/watch?v=YhdSVRP4uOs

This link will get you to a "home page" of all Lee's animations.http://youtube.com/leearnold

Some of the straight economics cartoons:"MONEY-symbol, Debt, Price, Supply and Demand"http://youtube.com/watch?v=f36Ia7ouE04"

Origin of Banking"http://youtube.com/watch?v=Byaf9GihXhY"

Marginal Analysis"http://youtube.com/watch?v=YhdSVRP4uOs"

Long-Term Farm Problem"http://youtube.com/watch?v=ZTV0yXDpNTs________________________________

The following ones are political polemics, but the information in them is pretty accurate, and they can be used to encourage students to reason critically about information:"President Bush's Tax Cuts" (this one shows a bit of elementary macro)http://youtube.com/watch?v=SA1f2MefsMM

Social Security"http://youtube.com/watch?v=Tts2uTWt6e8

Marginalism

Last week, Tim Schilling, Federal Reserve Bank of Chicago, explained in very concise terms the concept of marginal thinking. My textbook defines "marginal" as the additional of next unit. Mr. Schilling defined marginal as a border or threshold for whom a change in a variable such as price makes or breaks the deal. Those on the margin are those whose actions can be measured. Those on the margin consider the opportunity cost of their choices before making an economic decision.

People are constrained by their income and the prices of related goods. In econ 101, we measure the marginal rate of substitution by how much of good y will be exchanged for one more unit of good x. Or, to put it another way, how much of good y will be forgone to get one more x.

I hope I have conceptualized what it means to be on the margin. When a good is nonrival in consumption and nonexcludable, this analysis is incomplete but works only when a private good is available for consumption.

Gas Prices

The St. Louis Federal Reserve Bank prints the Regional Economist. There is an excellent econ 101 article on gas prices. The specific article is " Why Do Gasoline Prices React to Things That Have Not Happened? The link is http://stlouisfed.org/publications/re/2007/c/pages/gas-prices.html.

Introductory economics assumes the information is perfect and that markets react instaneously to market forces. This easily read article explains how spot prices are translated into current market prices. In the language of econ 101, suppliers expect a higher price for oil in the future so they restrict supply now. Their actions would move the supply curve to the left and raise the price. This explains the pricing decisions of gas stations who must respond to market forces. I sometimes explain to students that gas stations signal their price with the prices posted on signs by their pumps. The signal is a tacit collusive policy so that the stations don't compete on price but service or location. The Fed article makes it very clear that the stations are price takers making a normal profit. This is a must read for the serious student.

The Super Rich

According to Newsweek (July 23, 2007), the average income for the top 1% of households has grown steadily while the average household income has remained steady. The implicit intutition is that the gap between the rich and poor is growing (pages 38-40). Along the same line, Newsweek writes, "The very rich in America pay taxes at a lower rate than most working people.." In a related graph, the very rich are those earning $810,700 annually compared to the mean income of $58,700.

Normative economics deals what should be. So should the super rich pay a higher amount in taxes? I think the Newsweek article deals with the super rich who own private equity firms and are taxed at 15% instead of 35%. In this case, will eliminating the tax loophole by increasing the marginal rate of taxation for these 1% discourage investment? Of course it will. In econ 101 terms, there will be less investment opportunities at a higher rate than at a lower rate. Will the curtailed investment hurt the teacher or the cop? I doubt that too. In the words of Arthur Okun, "High tax rates are followed by attempts of ingenious men to beat them as surely as snow is followed by little boys on sleds."

I also believe that a higher tax discourages innovation. In other words, why should I work to improve my product when I'm going to have to give it away? A higher tax destroys incentives. If the super rich are beating the tax system, it's because of their innate abilities that allow profits to accure to a factor of production.

Las Vegas

If you're navigating to my blog after hearing me speak in Las Vegas, my direct contact information is dogbreath@machlink.com Thanks so much for your kind response to my research. I'm now celebrating the conclusion of two years worth of work.

I believe that you can't supress a market. Pamela Mickle at www.billofrightsinstitute.org believes that property rights will become a dominate issue in the years ahead. Property rights in econ 101 deals with the rights to use a resource and has implications in common resources and missing markets where pollution exists. Is this a topic that you'd be interested in as a main topic? I could lecture on the tragedy of the commons, pollution credits, and missing markets.

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Guaranteed Low Prices

Suppose a grocery store has a policy that it'll be the lowest price on groceries. Let's take a hypothetical store the size of Sam's Club. The store might post a sign that reads, "If you find a product anywhere cheaper, bring in the receipt and we'll pay the difference." This sounds like one heck of a good deal. But economics often focuses on those forces that are unobservable. I believe that the promise of the lowest price is a way of tacitly colluding on price.

If Juan brings in a receipt from a competitor, I know that I must lower my price. A price war could result. Using an approach that guarantees low prices, ensures that my competitors will not try to gain market share by cutting prices. The stores must compete on quality, location, or customer service. The policy also provides for immediate retaliation for cheaters and a means for stores to communicate prices. Let's assume that the price elasticity of food in inelastic. Econ 101 assumes that a firm with an inelastic curve will experience a decline in total revenue if prices decrease. Grocery stores would be better off not to engage in a price war since both would experience negative sales growth. The store's policy might overtly look like a procompetitive one, but is, in fact, a covert pricing policy designed to coordinate pricing between rival firms.

The motivation for this blog came from http://www.competition-commission.org/ an organization that investigates anti-competitive practices. This is a cool site and worth the effort for those pursuing law and econ.

Taxes

Econ 101 textbooks report that taxes can be progressive, regressive, and proportional. An ariticle shared on my Lystserv site, shows are taxes are regressive to high-income earners. A link can be found at: http://www.ctj.org/html/whopays.htm. The rest of this blog will explain the three types of taxes using as a reference the Paul Krugman-Robin Wells Microeconomics text published by Worth Publishing Company. A proportional tax is a flat tax. A progressive tax tries to capture some of your ability to pay by increasing the amount you pay in tax as your income increases. A regressive tax means that you pay less in taxes as your income increases.

Why Did Crime Fall in the 90's?

New economic research indicates that children exposed to lead in either paint or gasoline have violent tendencies. The article can be found at: http://www.msnbc.msn.com/id/19655897/

In Freakonomics, Steven Levitt asserts that crime fell in the 90'2 because of Roe v. Wade. Legalized abortion, explains Levitt, allowed mothers to abort unwanted childrend. These children are the ones most likely to commit a crime according to the book. The econ 101 explaination is that a mother knows more about her ability to raise a child than the state so she should have the choice to make decisions about whether to bear a child. In econ this is the classic asymmetrical information problem that leads to unintended consequences when a law is unilaterally enforced.

John R. Lott offered a rebuttal in his book, Freedomnomics, on why crime fell in the 90'2. Lott's explainations include the death penalty, better law enforcement, the right to bear arms. This book is a fast read and exceptionally well written.

The MSNBC link above offers a biological reason for abberant behavior. My law blog, http://www.fladdoglaw.blogspot.com/ has a link to a Newsweek article explaining how biology, life's experiences, and culture might link to aggression like Virginia Tech shooter Cho Seung-Hui. I wonder if this link isn't the association and causation problem.

Collusion in Music

In econ 101, textbooks like to say that horizontal mergers violate anti-trust laws but vertical mergers do not. Suppose Ford and GM were to merge. This is a horizontal merger. This would make the two automakers a monopoly. What if Ford would merge with the tire maker, the metal producer, the chemical makers, and the railroads. This is an example of a vertical merger--one in which all of the steps in making the finished product are aligned vertically. Why doesn't the Department of Justice frown on this type of merger? Because Ford can reduce costs by acquiring the resources it used to pay for and produce at cost. In theory, the company can now make more at a lower price.

In the music industry, I believe that this vertical merger should be investigated by the DOJ since the costs of production approach zero over large quantities. Say EMI wants to merge with Warner. It makes sense that there's less coordination problems with pricing so now it'll be easier to maintain the rigid $15 price per CD. With over 80% of the recorded music made up of EMI, Warner, UMG, and Sony/BMG, a horizontal merger should get the nose of the watchdog, DOJ, twitching.

A vertical merger might be like Wal-Mart and UMG merging. Wal-Mart carries about 2.5% of the recorded music on their shelves according to Long Tail author, Chris Anderson. A vertical merge would ensure that competitive pressures would be nonexistent in the CD market.

Most Favored Nation Contracts

Vivendi is a French conglomerate with interests in music. One of its subsidiaries is Universal Music Group. Universal Music Group (UMG) is the largest business interest with a 25.5% market share, it is one of the firms which makes up an oligopoly (Sony/BMG, Warner, and EMI are the others). According to Wikipedia, "UMG's record labels have many of the world's biggest artists [1] including The Killers, McFly, Shania Twain, Bon Jovi, Elton John, Method Man, Tupac Shakur, Aaliyah, Jay-Z, Mariah Carey, t.A.T.u., Eminem, Dr. Dre, Diana Ross, Reba McEntire, Luciano Pavarotti, U2, Kanye West, Rihanna, Bone Thugs-N-Harmony and 50 Cent. UMG owns one of the largest music publishing businesses of the world, the Universal Music Publishing Group." Vivendi is one of the "Big Four" in the music industry with sales amounting to €20.044 billion or $40 billion. The others with geographical location follow.

Sony-BMG is a 50-50 merger between Japanesse Sony and German Bertlesmann and includes ownership and distribution of recording labels such as Arista Records, Columbia Records, Epic Records, J Records, RCA Victor Records, RCA Records, Legacy Recordings, Sonic Wave America, and others. My estimate for sales revenue is $10 billion.

EMI (LSE: EMI) is a music corporation based in London who is best know for producing such stars as The Beatles, Tina Turner, Frank Sinatra, Selena, Garth Brooks, Morrissey, and Joss Stone. Last year EMI reported sales of £2.07 billion or roughly $4.14 billion.

Warner, headquartered in New York, USA, accounts for the "Big Four" music group or what I call the oligopoly. According to Wikipedia, Warner made 3.5 billion last year in sales (NYSE: WMG).

Trying to knock these big boys out would be like getting into a fight with Mike Tyson, George Foreman, Muhammad Ali, and Evander Holyfield. And there's no doubt that if we put these big boys into the ring, one would come out the champion. But at what cost. It's no different than the king of the jungle feeding on antleope. The king could beat all of the other lions, but it's smarter not to. What if the big four bonded together an acted as one? Let's say they acted like a monopolist. How could rivals act as one without cannibelizing their own self interests? One way is using the most favored nation clause in their negotiations.

Say the group wants to put out a compliation CD. Under this clause, the rivals can share licensing contracts, terms with retailers on volume discounts, and cost data to make sure that no one is getting a better deal. Since the Big Four are multinational corporations, they invoke the most favored nation clause and legally collude on prices, output, and marketing decisions. The group has every incentive to stick to their agreement since cheating would make it hard to maintain prices and further cooperation on concerts, tours, and compliation CDs would be harder. (In 2002 the group cooperated on a joint music venture when they launched MusicNet and PressPlay. The group also used independent consultants to coordinate decisions.)

Say the industry leader, UMG, lists the price of a CD on iTunes. The rest know the price and can duplicate it legally without alarming the watch dog, Department of Justice. Now, the oligopoly can maximize profits. The Big Four also share an equal amount of the music industry pie. Since the Big Four can share cost information and legally collude on prices, is it any wonder than CD prices have remained rigid at $15?

Is the Music Industry a Contestable Market ?

A contestable market is one in which entrance and exit is costless. In his landmark work, William Baumol describes a market which might have only a single seller selling a unique product but unable to sell at the monopoly price. When the price rises more than the long-run competitive equilibrium, new competitors will enter the market and steal the profits. In the music industry, economies of scale resemble that of a natural monopoly. In the graph accompanying this blog, the music industry would keep the price around the ATC to keep competitors at bay. Could this explain the price rigidity in the industry?

The internet is the disruptive technology that makes entrance easy. Sometimes, musicians will use Audacity and a computer to record their work then upload to Facebook or My Space. This is nearly costless entrance and exit. I believe the existence of long-term contracts by Warner, Sony-BMG, EMI, UMG have made exit from the industry very costly for those firms who act like a monopolist through tacit collusion. The music industry is not contestable since 80% of the industry is dominated by 4 firms acting like a monopolist with no way to dispose of assets.

Winner Takes All

Robert H. Frank wrote the Winner Take All Society to show why vast differences in income disparity exists. I wonder if the winner take all mentality is a reason why the music industry continues to price CDs at a rigid $15.

Suppose Tiger Woods beats Angel Cabrera at the John Deere Classic in Moline, Illinois. Tiger will win significantly more in winnings than Angel in prize money, endorsements, and advertisments. You'll turn on the televison and see Tiger. The front page of USA Today will show Tiger holding a trophy the size of a golf bag. Tiger will be every where. It'll seem like Tiger has taken it all.

In the music industry, small differences in ability leads to big recording contracts with Universal Music Group, EMI, Sony/BMG, and Warner. The oligopoly, acting tacitly, make sure that the artists they sign are promoted in Rolling Stone, iTunes, and their CDs get the most shelf space. It'll seem like everyone wants the best CD and it'll be easy to buy it at Best Buy, Target, or Wal-Mart.

It's virtually costless for the music producers to replicate a CD and place them on the shelves. Almost 80% of the space on shelves is occupied by the oligopoly group because the artists they endorse earn the most money for the retailers. Is it any wonder then, that the music group is resisting downward pressure on their prices since they would make less revenue per CD? So the price of a CD stays rigid at $15.

In Rolling Stone this month, Brian Hiatt and Evan Serpick write that the pricing model of the oligopoly is out-of-date. I concur, as I believe tastes and prferences have changed in favor of MP3 players like the iPod and Zune. Consumers might be better off delaying their purchase of music until the industry updates its pricing model that approaches the competitive ideal.