Category Archives: Uncategorized

Incentivising your work-staff: a case study

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Although this article from Fortune was published over the summer it highlights an important economic concept: incentives.

No tipping policy

The “no tipping policy” introduced by Bar Macro institutes a new incentive structure for the staff by providing profit sharing, health care, stable wages, vacation days, etc…

The immediate effect was an increase in revenue of 26% and decline in costs of 8%

Is this really a surprise though?  We teach our MBA students that efficiency wages, profit sharing, and fringe benefits are important motivators for workers.  It cuts down on turnover, shirking, and general inefficiency.

So is this model sustainable in the food service industry?  I would argue that it is but only for certain restaurants.  Since, tipping is generally an ineffective method of judging service it would take an owner dedicated to their customers and employees to institute such a policy.

Pricing in the pharmaceutical industry: Profit driven or Morally motivated?

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Just recently, news broke of an american company, Turing Pharamceuticals, and its CEO Martin Shkreli increasing the price of the drug daraprim from $13.50 to $750 per pill.

Our class discussed the practice that The New York Times reported on

Drug Goes from $13.50 to $750, overnight

We first discussed the pricing decision and how revenue should rise given that this drug is fairly inelastic.  They question was then asked: If a firm’s organization structure is that of maximizing profits, is what Turing doing wrong?

We watched the interview from Bloomberg next to see how the CEO positioned the price increase:

Reaction was mixed.  Some students agreed with the pricing decision and respected how Turing used the free-market system to maximize profits.  Others quickly pointed to the moral obligations of the firm to provide the drug at a fair cost.

Our discussion was marked with some very good insights/questions:

Is it the moral obligation for the seller of the drug to vet the buyer of the drug?

At what point does regulation in the pharmaceutical lead to all drugs being classified as necessities?

What is the fair-profit price if no R&D is being done and should we follow up on R&D promises?

What is preventing the company from investing the profits claimed to be earmarked for R&D into another drug in a similar market setting?

 

Students were quick to identify that this CEO has done the same price hike in a previous company, with no track record of producing any tangible R&D.

CEO hikes price of kidney drug by over 2000%

Turing has since rescinded the price increase and has settled on a lower, yet to be disclosed, price.

 

 

How Does The World Spend Their Money?

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This chart from The Economist, shows how countries all over the world spend their money

How countries spend their money

The chart summarizes percentages of spending into distinct categories like Healthcare, Food, Transportation, etc.

What immediately stands out is the large proportion of healthcare spending by the United States.  Not only do households spend roughly 30% of income on healthcare, there is a staggering difference between countries.  Only Australia and South Korea spend above average amounts with the remaining countries spending below average amounts.

Other observations include South Korea spending the most in Education at 6.7%

Russia spending the most on Alcohol & Tobacco at 8.3%

What this chart doesn’t account for well, is the purchasing power of average income of households in different countries.  With lower incomes, wouldn’t we expect to see Mexicans spending a majority of their income on Housing, Transportation and Food?

 

 

 

Paper, Rock, Scissors: The game theory approach

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In class today we discussed the theoretical structure of the game: Rock, Paper, Scissor.  We came the conclusion that a random strategy is generally the outcome we would witness, even empirically.

The business insider posted an article awhile back describing this exact solution and how no Nash equilibria exist in this game and that the best strategy should be a random one.

http://www.businessinsider.com/how-to-beat-anyone-at-rock-paper-scissors-2014-5

They go on to describe an interesting pattern which developed among winners and losers.  Winners tended to replicate their winning play over multiple games while losers tended to switch to the next strategy sequence, i.e. moving from rock to paper to scissors.

This begs the behavioral economics question as to why?  If random is the best we can do, what factors are influence the strategy set for winners and losers?

Mapping the Difference Between Minimum Wage and Cost of Living

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A recent post found in The Atlantic:City Lab described the lack of a livable wage across the country.  They created a nice little map tool to identify areas where the disparity between minimum wages and costs of living were the largest.

http://www.citylab.com/work/2015/09/mapping-the-difference-between-minimum-wage-and-cost-of-living/404644/?utm_source=SFTwitter

No surprise in that areas across the country like the Northeast and California where high costs of living outweigh the minimum wage disparity is seen to be the largest.

What becomes interesting is that for single individuals Washington state becomes a “living -wage oasis”.  That has to be due to the recent changes in minimum wage laws that state has seen.

Regardless though of the area it becomes clear that a family of two children fails to meet the basic costs of living with a gap in the wage needing to be about $20 per hour higher.  WOW.

Quinoa Production in Bolivia

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In class this past week we reviewed the concepts of supply and demand.  We went as far as to simulate a market where buyers and sellers came together to maximize their potential consumer and producer surplus.

To enforce the idea of how demand shifts can cause price changes in the market we introduced  the example of Quinoa in Bolivia.

Below is an article entitled, “Can vegans stomach the unpalatable truth about quinoa?” by Joanna Blythman.  This was published in the Gaurdian in January, 2013

http://www.theguardian.com/commentisfree/2013/jan/16/vegans-stomach-unpalatable-truth-quinoa

The writer believes that the increase in demand from western sources has priced local consumers out of the market.

In response economist Marc F. Bellemare posts these ideas to his blog:

http://marcfbellemare.com/wordpress/8218

http://marcfbellemare.com/wordpress/10754

So who is right here?  I believe that Marc makes some compelling points regarding the right questions economists must ask.

I’m anticipating his results and look forward to seeing how this argument develops.