In a recent article from Ars Technica, Jon Brodkin outlines the arena where Netflix, Comcast, and the FCC are battling over the implementation of data caps from ISPs.
The deeper issue here is how we approach net neutrality and allow ISPs to control content. Facing data caps, consumers will have to make marginal choices on what content to consume, forcing some consumers off the internet and onto cable TV. This seems like a clear reduction in competition.
Comcast, a; virtual monopoly in some markets, argues that the implementation of data caps are to “align consumers’ use of the network with what they pay.” This tactic known as price discrimination, allows firms to charge a consumers willingness to pay instead of one flat market price.
Comcast isn’t alone in their actions though. Take for instance mobile ISPs and their arbitrary mobile data caps. Overage charges again are a way for ISPs to determine a consumer’s willingness to pay for access to streaming content. Moreover, some mobile carriers have exclusive deals in place with content providers where streaming content from these providers does not count against consumers’ data caps. This is clearly a net neutrality issue and one that many consumers have yet to understand.
To the dismay of almost all of my students ramen noodles are no longer the go to inferior good example.
In a recent study by Michael Gibson-Light, it was revealed that ramen noodles have overtaken cigarettes as the preferred prison currency. Citing a variety of reasons for the departure of preference, almost all reasons lacked economic foundation.
Does ramen meet our theoretical money criteria? It certainly is durable and portable. It has uniformity and meets our idea of acceptability but is it divisible? To en extent yes, but as an astute colleague indicated, it sure must be hard to divide that flavor packet.
In the past, we’ve seen cases where pharmaceutical companies have virtual monopolies on drugs and courses of treatment e.g. Duripram. Here is another case, where this time its is the maker of Epi-Pen which has a monopoly on a highly inelastic good.
The question has come up time and again, is it ethical to take advantage of the market in way which maximizes profits? From our coursework, we would expect this firm to raise prices along with total revenue, since the good is almost perfectly inelastic. Where do you stand on this?
Is this how students feel about assignments?
In an excellent and very accessible article in the World Economic Forum, John Authers presents 12 factors currently contributing to the global volatility in markets, and general uncertainty in the economic climate.
One of the most important contributions of this article is to correctly explore the issue with Crude Oil prices and the impact US production has on global markets. Not too long ago, “peak oil” was a very serious idea impacting economic markets in a very different way. Will we see these ideas again, I’m not sure. The stone age didn’t end because we ran out of stones.
One of the most important questions which comes out of this brief analysis is, “Are we headed for another recession?” Well, that question is hard to answer, but there are market indicators signaling a recession is on the horizon. But on the other hand, there are many macroeconomic indicators pointing to expansion. So, I guess, it depends on who you ask.
If you have 10 minutes, give this article a read. At the very least you will be marginally informed of the global economic climate.
In a very interesting article written by Bloomberg Goldman Sachs reflects on their profit margin analysis.
Looking at why profit margins are expending, Goldman analysts refer to four key points:
- Strong commodity prices
- Emerging market cost arbitrage
- Demand growth from emerging markets
- New technology driving corporate efficiency
This is where we want to use some of our economic theory. We would expect that profit margins at some point would roll over and mean revert. Why? Because of competition. We would expect firms to enter markets and bolster competition; thus eroding profits. If we don’t see that happening and margins remain high, does that mean capitalism is broken?
The World Economic Forum recently published an interesting article priming an important discussion we all need to have. Four Nobel economists on the biggest challenges for 2016 compiles the thoughts of Robert Shiller (Noble winner 2013), Edmund Phelps (Noble winner 2006), A. Michael Spence (Noble winner 2001), and Alvin Roth (Noble winner 2012) on the biggest economic challenges facing the world today. It is a nice little read and could help to spark interest for some important problems today.
Shiller, believes that “cyber-physical systems” or the autonomous nature of industry is the biggest issue facing the world today. Most importantly, he believes that hiding within this Fourth Industrial Revolution is the possibility to exacerbate the inequity the world is currently facing.
Phelps, identified the main problem to be the ineffectual mechanics modern economics has in place to correctly predict and help the economy as a whole.
“The difficulty is that standard economics-both Neo-classical, Keynesian and supply-side economics – is unsuited to find the cure. The economy is not a machine that can be cranked up to the best possible performance level: a functioning modern economy is a living organism made up of all the individuals participating in it. Their initiatives are sparked by imagination, encouraged by values and assisted by their personal knowledge.”
Spence, offered an interesting problem. he believes that reversing the deteriorating pattern of global growth is imminently important in 2016. Essentially, we aren’t consuming enough. The lack of consumption has dire effects on the global economic environment. We need to find a way to spark aggregate demand, possibility without the help of monetary policy.
Roth explained that the refugee relocation and matching problem we saw develop in 2015 will persist in 2016. Roth went on to explain that it is important to match the refugees with a place which will allow them to thrive and grow, since they will be an important component to whichever economy they enter.
Personally, I think that the most important economic problem we face in 2016 is the impact global warming is already having across the world. I’m sure I sound like a broken here by stating this opinion, but we are certainly at an important crossroads (some argue we’ve long since passed the point of helping ourselves) which could set the course for years to come.
Students often find themselves in the first few days of class understanding the idea of opportunity cost. Inevitably, this leads to the discussion of implicit costs observed by a firm and how accountants and economics track these costs.
Most often, students have a hard time grasping the real world implications of accounting for these costs using GAAP and theoretical economic ideas. In 2003, the WSJ published a small article from the eyes of an accountant Robert L Bartley in order to shed some light on how accountants view the differences.
Using GAAP, earnings per share (EPS) are supposed to measure the profit of a company. As Frank Knight (a very famous economist) wrote, it was the income to the proprietor. Granted, there are some more subtle nuances identified by economist throughout history, which we acknowledge and teach today but the the identification of economic and accounting profit needn’t be so muddy says Knight. It is really about perspective. Economists are concerned about the dynamic nature of production while the accountant is interested in proprietorship.
As the article states, “Knight warned that ‘economic profit cannot be carried to theoretical completeness’ because it is difficult to quantify.”
If you’re new to some of this language, here is a nice breakdown of some the terms and how economists have come to understand them.
Earlier today the Federal Reserve decided it was time to raise interest rates for the first time since 2006. The thought was that they should start with an increase, over time, of 25 basis points. This may seem like not very much, but really its the start of something more. How much more? Nobody knows for sure (even Janet Yellen).
What does this mean for you, well probably not a lot. In macroeconomics, we would teach students to expect a slight uptick in savings as interest rates become more favorable but in turn would also lead to lower consumption. Really, the adjustment period or the interest rates will roll out over the course of the next year, as to give investors a lot of time to adjust to the changes.
So why did they raise the rates now. Well, many economists believe that this was a good time to raise rates. The zero lower bound was really getting in the way of monetary policy decisions. With the increase in rates, it gives the Fed a little flexibility. Also, inflation rates were not meeting the targets. Raising the rates, hopefully will help in the long term to spur growth and meet that second mandate of the Fed.
Here is a link describing what happened, why, and what to expect now.
I just came across this article on Research Digest which explores the relationship between expertise and closed-mindedness. It is definitely worth a read but it got me thinking about decision making.
The article expresses that there could indeed be a strong link between people who feel that they are experts in a field and the dogmatism they provide. A recent study in the Journal of Experimental Social Psychology published the findings.
So my first thought was does this occur in economics or finance? We assume that agents are experts in things like ranking their own choices for utility. Do these dogmatic feelings carry over to here? I’m sure they do to some degree. And if this is the case, how does an economist model this behavior?
We use habit persistent utility functions, but what about misidentified preferences? Generally, our assumptions on preferences require them to be complete, reflexive, and transitive. This last assumption should hold for “rational” individuals. It would be interesting to include the dogmatic behavior of agents to see if any tractable results rise to the surface.
A more macro view of this behavior would be to see how individuals in the finance sector absorb information. Does expertise breed closed-mindedness in this arena? My intuition says yes. I believe that there is some persistence to beliefs rooted in some dogma surrounding each institution. Again, It would be interesting to see how, if at all, this could be measured through econometrics.