Friday, October 31, 2014

Third-Quarter G.D.P. Rose 3.5% And More On Airline Prices

Click here to read the NY Times story by PATRICIA COHEN. The news, however, is mixed. There are good signs and maybe some signs of concern mentioned in the article. Here is an excerpt:
"Unlike the seventh game of the World Series, the debate over the economy’s strength sometimes seems like a playoff competition that goes on forever between skeptics and believers. But on Thursday, the boosters won at least a temporary victory with a government report that estimated the nation’s economic output rose at a healthy 3.5 percent annual rate in the third quarter.

After an even faster pace of growth in the spring, the higher-than-expected advance in gross domestic product — a measure of all the goods and services produced in the United States — was driven by gains across the board, bolstered by an unusual burst of military spending and a more favorable trade balance.

“This is the strongest six-month interval we’ve had in 10 years,” said Carl R. Tannenbaum, chief economist at the Northern Trust Company. “The pace of the expansion has clearly increased.”

Now for airline prices. Last week I posted about how fuel prices were down yet airlines were not lowering their prices, which might indicate that the industry is an oligopoly. But this week there was a conflicting report. See International Low-Cost Airlines Drive Transatlantic Fares Into The Ground by Grant Martin of Forbes. Excerpts:
"If you’ve been wondering why airfare to Scandinavian countries has been so inexpensive for the past few seasons, you have one particular airline to thank: Norwegian Air. For the last year, the self-described low cost carrier has expanded aggressively across the globe, and as a result of the new low fares they brought into the United States, domestic carriers have lowered their prices to compete. These days, a ticket from San Francisco to Copenhagen with a layover in London can often be cheaper than a sole ticket from San Francisco to London.

Norwegian Air gets away with charging rock-bottom prices by taking advantage of low operating costs and charging passengers via an a là carte model. Passengers who book air passage on the airline get just that; baggage, seats and food all cost extra. Conversely, a legacy airline such as American, Delta or United usually provides all of that bundled together with their international fare."

"Norwegian’s popularity has grown so much that they’re trying to expand into different US markets, but complications with permits and strong resistance from the legacy airlines have caused delays.

While Norwegian continues to address its teething problems, other airlines have grown and replicated their success. Just last week, Wow Air, an Icelandic low cost carrier announced service to the east coast of the US for as little as $99 one-way. Lufthansa, the flag carrier of Germany, is also working on the launch of an international low cost carrier."

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.