Friday, October 24, 2014

Is The Airline Industry An Oligopoly?

See US Airlines Hike Base Fares Despite Falling Fuel Prices; Consumers Unhappy. Excerpt:
"Such fare hikes indicate that airlines don’t plan to pass on the savings on jet fuel from recent oil price drops, Rick Seaney, CEO of travel search site, wrote. Fuel is the largest expense most airlines face, and oil prices have decreased by as much as 25 percent since early summer."
 As I show below, lower costs for firms but not a lower price for the buyers is a possibility in oligopoly. See also Airlines Profits Soaring.

We recently covered market structure in my microeconomics class. Usually four market structures are covered: perfect competition, monopoly, oligopoly, and monopolistic competition. Oligopoly is an industry with a relatively small number of firms which is not easy to break into. The auto industry is often given as an example.

One theory of oligopoly is that each firm (an oligopolist) might face a "kinked demand" curve. All firms choose Q so that MR = MC. Once Q is found that allows us to get the price. But if MC falls (due to things like lower fuel costs) and we stay in the gap in MR, Q does not change and neither does price.

I show later that even a monopoly will lower their price when costs fall.

It is possible that the airline industry is competitive (it is unconcentrated according to Justice Department merger guidelines as I show below). In that case, we might just be seeing an increase in demand outweigh the increase in supply caused by the lower fuel costs, as in the next graph

The Justice Department takes the market share of all firms in an industry, squares them and then adds them up. Here is the airline industry

Firm %Share Squared
American 21 441
Delta 16.6 275.56
Southwest 16.3 265.69
United 15.4 237.16
JetBlue 5.1 26.01
Alaska 4.2 17.64
ExpressJet 2.5 6.25
SkyWest 2.3 5.29
Spirit 2 4
SUM 85.4 1278.6

The 1278.6 is the Herfindahl-Hirschman Index (“HHI”) of market concentration. Now there is still 14.6% of the market going to other firms but they will all be very small. Since HHI is less than 1500, the Justice Department considers the airline industry an "Unconcentrated Market." See Horizontal Merger Guidelines. Mergers are not usually a concern. So maybe it is not an oligopoly. I am not sure.

Here is that monopoly graph mentioned earlier. Price falls with lower costs.

Friday, October 17, 2014

Who are the richest people in the world?

Australians. See Property makes Australians the world’s richest, says Credit Suisse. Excerpts:
"Thanks to their houses, Australians are the richest people in the world, according to the investment bank Credit Suisse.

The fifth annual study by the Swiss bank of global wealth trends found the median Australian adult was worth more than $US225,000 ($258,000) in June, well ahead of the second wealthiest population on this measure, the ­Belgians, at $US173,000.

They were followed by the Italians, French and British, all at around $US110,000.

Only 6 per cent of Australians have wealth below $US10,000, compared with 29 per cent in the United States and 70 per cent for the world as a whole.

Household wealth in Australia is heavily skewed to "real assets" – essentially property – which average $US319,700 per household, or 60 per cent of gross assets."

"Australia is classified a "medium ­inequality" country by the Credit Suisse researchers, a group that includes New Zealand and is defined by the richest 10 per cent controlling between 50 per cent and 60 per cent of the country's net wealth.
Among developed economies, Hong Kong, Switzerland and the United States are deemed to have "very high inequality", where the top 10 per cent control more than 70 per cent of the wealth. 
This is borne out by the average wealth figures of the US. Median adult wealth in the world's largest economy stood at only $US54,000 – well out of the top 10 richest populations.
But when measured on an average – or mean – basis, the US ranked fourth in terms of household wealth at $US348,000."

Friday, October 10, 2014

Mexico's junk food taxes hitting Pepsi, Coke

Click here to read the AP article by CANDICE CHOI.

In a couple of my micro sections we recently read a chapter from The Economics of Public Issues on obesity. Some people think that taxing sugary drinks and snacks will help reduce the problem. Here are excerpts from the article linked above:
"PepsiCo reported a higher quarterly profit Thursday as global sales rose, but one weak spot was Mexico. The company said snacks sales volume declined by 3 percent, hurt by a new tax on junk foods.

Recent declines suffered by Pepsi and Coke in Mexico underscore why the beverage industry is fighting tax proposals on sugary drinks in in San Francisco and nearby Berkeley.

PepsiCo — which makes Frito-Lay chips, Gatorade and Tropicana — reported similar declines in its snacks business for the first half of the year, starting when the tax went into effect.

Coca-Cola, which reports its third quarter results Oct. 21, has also reported beverage volume declines in Mexico for the first half of the year, citing a similar tax on drinks. Mexico has the world's highest per capita consumption of Coca-Cola drinks."

"The taxes in Mexico add one peso, about 7 cents, to the cost of a liter of sugary drinks, and 5 percent of the price to foods with 275 calories or more per 100 grams."
See a post from last year Will A Tax On Junk Food Help Mexico Fight Obesity? Both Mexico and the U. S. have very high obesity rates.

Friday, October 03, 2014

The Unemployment Rate Fell From 6.1% to 5.9% In September. But How Good Actually Is That News?

If we look at the percent of the of civilian noninstitutional population that is employed, it registered only a very small increase. The reason why this might be important is that the unemployment rate can fall if people simply drop out of the labor force. If you are not actively seeking work, you will not be counted as an unemployed person. But dividing the number of people employed by the population avoids this problem.

It was 58.9649% in August. It rose to 59.0068% in September. So basically both months are 59%. You can see the numbers at Labor Force Statistics from the Current Population Survey. That is presented by the U.S. Bureau of Labor Statistics.

The last recession started in December, 2007. In 2007, we had 63% of the population employed. In Sept., we increased about 7 one-hundredths of a percent. In a year, that would be about .5%. If we do that for the next 8 years, we will finally be back to the 63% we had in 2007.

Friday, September 26, 2014

U.S. Economy Grew at 4.6% Rate in Second Quarter

Click here to read the WSJ article. Excerpts:
"The U.S. economy grew in the spring at the fastest pace since late 2011, another sign the recovery is regaining steam after a rough start to the year.

Gross domestic product, the broadest measure of goods and services produced in the U.S., expanded at an annual rate of 4.6% in the second quarter, the Commerce Department said Friday in its third estimate of the gauge. The agency previously pegged April-through-June growth at 4.2%.

The economy last grew at a 4.6% pace in the fourth quarter of 2011 and hasn't exceeded that rate since the first three months of 2006, during the last economic expansion.

The spring's strong showing owed partly to a rebound from a severe winter, when the economy contracted at a 2.1% pace [that is, GDP was down 2.1% in the first quarter at an annual rate]. Combining the two quarters, the economy grew at a pace just above 1% in the first half of 2014."

"Unemployment, at 6.1% in August, remains historically high, though it has come down sharply. And despite stronger job growth this year, workers' wages are barely climbing faster than consumer prices. The housing market is struggling to regain momentum, and weakness in overseas economies is threatening to hurt U.S. exports."

Friday, September 19, 2014

Which metro area has the highest paid workers?

See The biggest paychecks? They're in Midland by L. M Sixel of the Houston Chronicle. Excerpts: 
"Workers in the West Texas city in 2012 earned an average of $91,200, including wages and benefits, new data from the U.S. Bureau of Economic Analysis show.

The U.S. average was $56,900 and the Houston average was $71,600, said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston, who recently crunched the bureau's data to come up with the comparisons.

Gilmer noted that the high wages in Midland reflect its relatively small population of at least 114,000, and its remote location.

"It's very difficult to attract labor there," Gilmer said. "When incomes rise in the oil sector, they just pull the entire wage pool up with them.""

"managers of energy companies would come in for lunch and give their business cards to their servers. The next day, the server would report to the oil field instead of the restaurant."

"a real estate developer from El Paso who got the idea of taking a crew to Midland to build houses. The crew members were immediately offered jobs by oil companies scouting workers with construction and other skills."
"Employees in the Houston area who work in the drilling and exploration end of the energy industry earned an average of $302,900 in 2012. (Local wages and benefits still haven't recovered from the 2008 high of $328,500.)"

Friday, September 12, 2014

There Is A Black Market On Capitol Hill

Yes, a black market in snacks. Pretty shocking. See Inside Capitol Hill's black market: Snacks by HELENA BOTTEMILLER EVICH of POLITICO. You can also check out POLITICO's guide for finding popular congressional office snacks. Excerpts:
"Big deals over immigration reform or government spending may not be getting made on Capitol Hill, but political maneuvering can yield a free pack of Skittles for a staffer with a sugar craving.

It just might cost a bag of Fritos.

Home-state snacks are a mainstay in congressional office lobbies, alongside district maps, hometown magazines and displays of local tchotchkes. Walk into Sen. Rand Paul’s office and you’ll find Kellogg’s Pop-Tarts and Nutri-Grain bars in a basket next to the Kentucky almanac. Down the hall, Georgia Sen. Johnny Isakson serves peanuts and Coca-Cola. Head upstairs to New York Sen. Kirsten Gillibrand’s office for Chobani yogurt.

But the treats not only give visiting constituents a taste of home, they also fuel black-market snack trading among House and Senate staffers.

Beyond the official displays of food politicking — like when John Boehner sent Nancy Pelosi Cincinnati’s famous Graeter’s Gelato for her birthday — the little-known snack trade cuts across state, district and party lines.

Dozens of junior staff who spoke with POLITICO described an elaborate barter system based on local products. Pepsi is swapped for M&M’s, and Coca-Cola for Craisins. Unpaid interns are rewarded with treats for fetching lawmaker signatures. Sharing a cellphone charger with another office might net a bag of chips or candy. The most dedicated snackers have compiled comprehensive lists of who has what — a Capitol Hill snack bible of sorts.

Food and beverage companies, or farm cooperatives, donate most of the snacks on the Hill, but some offices do purchase their own reserves. The donations are kosher under ethics rules as long as the products are from the lawmaker’s state and are primarily for “promotional purposes,” as well as available to office visitors and of minimal value to the recipient. Staffers aren’t supposed to directly ask suppliers for their snacks to be replenished, but they tend to not run out for long.

The covert snack economy is not just a way for hungry staffers to seek out chocolate-covered macadamia nuts from Hawaii or Lay’s chips from Texas. It’s a system for aides, especially low on the totem pole, to make friends, forge informal alliances and, ultimately, help keep Capitol Hill functioning.

Between arranging constituent tours and taking calls, staff assistants use a massive email Listserv to arrange snack swaps.

“They’re the ones that work the trades,” explained Adam Russell, a spokesman for Rep. Sam Farr (D-Calif.). Constituents visiting his office are offered walnuts, prunes and pistachios.

Dozens of offices serve treats from large conglomerates like PepsiCo, which has factories or distribution facilities in various lawmakers’ districts. Rep. Mike Pompeo (R-Kan.) serves PepsiCo products because there’s a bottling plant in Wichita, Kan. He’s personally a big fan of Snickers and Diet Pepsi, according to his staff.

Frito-Lay chips and Mars candy are the most common — and perhaps the most commonly traded — snacks on the Hill. Both manufacturers have operations in several states.

Home-state snacks transcend party affiliation. Republican Sen. Marco Rubio and Democrat Rep. Debbie Wasserman Schultz may not find much common ground, but they agree Tropicana orange juice is a delicious treat for guests.

And orange juice, it turns out, is a hot commodity on the Hill, trading at times for as many as five bags of Lay’s chips.

In an Arkansas-shaped basket, Republican Sen. John Boozman’s office serves a variety of Frito-Lay snacks, Little Debbie snack cakes and crisp rice treats made by Riceland, a farmers co-op. In Arkansas Democratic Sen. Mark Pryor’s office, you’ll find the same snacks, plus some Mountain Valley Water from Hot Springs, Ark.

Pop-Tarts may be “very popular” with Paul’s Kentucky visitors and staff popping by for a treat, but the Republican senator, known for being a bit of a health nut, does not eat them, according to his staff.

Not all products on the political circuit are well-known brands. Sen. Richard Blumenthal (D-Conn.) has Ola! all natural granola, Rep. Sam Graves (R-Mo.) has Cherry Mash, a chocolate cherry treat, and Rep. Dave Reichert (R-Wash.) has Aplets & Cotlets, a square fruit puree and nut snack that isn’t all that tradable, according to multiple sources familiar with the delegation.

Some offices on Capitol Hill are not looped in on the snack trade and don’t have their own currency, and there are few staffers in either chamber who don’t know where the goods are and how to get them.

Those in the know target New York Sens. Chuck Schumer’s and Gillibrand’s offices, which actually have Greek yogurt-filled fridges. So do Idaho Sens. Mike Crapo and Jim Risch.

Ask around about who has the best snacks, and you’ll run into some local food folklore. Someone on the Hill has San Pellegrino, aides say, but they’re not sure who, or they won’t divulge their source. POLITICO couldn’t find the sparkling beverage. Another office had heard Rep. Jared Polis (D-Colo.) serves Kombucha, a fermented “foodie” drink, on tap. He doesn’t, according to his office. At least two staffers had heard tales of free Shiner Bock flowing from the Texas delegation, but the search for the beer from the Lone Star State came up dry."