Managerial Econ

A Hiccup in a Price War

noreply@blogger.com (Michael Ward) — Thu, 07 May 2026 17:57:00 +0000

Many antitrust economists are wary of the efficacy of predatory pricing, the strategy of pricing below costs to drive a competitor out of a market. The usual counter-argument is that, for it to work, the inevitable losses this will entail must be recouped after the rival has exited. Recoupment requires higher prices ... that can attract rivals again. Additionally, there are many tactics the prey can implement during the predation phase to try to thwart the predator.

A new one to me is giving away booze. As described in an article for Southwest Airlines 50th anniversary, Southwest pioneered frequent, cheap flights within Texas in the 1970s. In 1973, Braniff and Texas International started a price war offering $13 tickets. This was below Southwest's costs and were intended to drive Southwest out. Southwest countered with two-tiered prices. They would match the $13 price but also offer a $26 price that included a fifth of liquor. Most of its customers were business travelers who would expense the $26 ticket and keep the liquor. Since the liquor cost Southwest less the the the difference in the prices, it made more on the $26 tickets. Few of its customers opted for the money losing $13 tier. And, of course, the publicity of "free booze" was priceless.

Demand for Metro Rides to FIFA Matches is Inelastic

noreply@blogger.com (Michael Ward) — Mon, 04 May 2026 22:28:00 +0000

A recent Forbes article helps explain why getting to FIFA World Cup matches by will cost spectators $150 just for the metro train to get to the stadium. One contributing factor is that demand becomes more inelastic when it is a complement. Fans who have already committed to travel, lodging, and match tickets may have already budgeted $5,000 for the event. What’s another $150? The World Cup in NYC is a once-in-a-generation event for many attendees, and transportation costs are a small share of total trip expenditures. Combine that with few viable substitutes ways to reach the stadium and you have a market where consumers are effectively “captive.” Under these conditions, even large price increases result in only modest reductions in quantity demanded, allowing providers to charge prices far above normal levels.

From a pricing perspective, mega-events shift firms toward the region where optimal markups are high because elasticity is low. The inverse elasticity rule implies that when consumers are less price responsive, firms (or cost-recovering public agencies like NJ Transit) can pass through more of their costs without losing much demand. The $150 fare is therefore less an aberration than a predictable outcome of event-driven economics. The broader lesson is that mega-events elevate willingness to pay for complements, making demand more inelastic.

Nationalistic Self-Sorting

noreply@blogger.com (Michael Ward) — Thu, 30 Apr 2026 19:29:00 +0000

Un Français hisserait-il jamais le drapeau d'un autre pays?

Vertical Integration and Screening

noreply@blogger.com (Michael Ward) — Wed, 29 Apr 2026 18:36:00 +0000

Cutler et al have published a new paper that adds to the catalog of reasons why firms might vertically integrate. They examine Skilled Nursing Facilities (SNFs) owned by hospitals. SNFs make referrals to hospitals for their residents who develop medical issues. But some referrals are more lucrative than others. The SNF has private information about which referrals will earn the hospital more profit. An unaffiliated SNF will capture none of this, but a vertically integrated SNF/hospital can profit by screening in the more lucrative patients and screening out the less lucrative patients.

Algorithmic Pricing Paper by some middling economist

noreply@blogger.com (Luke Froeb) — Wed, 29 Apr 2026 17:37:36 +0000

Froeb, Luke M. and Tschantz, Steven T. and Sokol, D. Daniel, Algorithmic Pricing When Capacity Turns Over: Competition, Collusion, and Information Sharing (April 29, 2026). Available at SSRN: https://ssrn.com/abstract=6675958

BOTTOM LINE:

First, sharing occupancy information intensifies competition, as firms compete in each realized state rather than on average. Second, as occupancy rises, it becomes more difficult to absorb diverted rival demand, so firms become worse substitutes for each other, shrinking the gains to collusion. Third, scale pools demand risk, raising occupancy and lowering prices.

Together, these findings identify a structural channel through which algorithmic pricing in capacity-constrained markets generates efficiency gains rather than collusive overcharges. ... The results yield practical guidance on which pricing algorithm to adopt and what information to feed it.

GLP-1 and Wedding Dress Uncertainty

noreply@blogger.com (Michael Ward) — Mon, 27 Apr 2026 23:00:00 +0000

Many a bride has chosen a dress a bit too small in anticipation of losing a few pounds before the big day. Sometimes they miss their goals. Bridal studios have long anticipated and planned for this. But with GLP-1 weigh loss medications, the dieting goals have become more ambitious. Even when the weight goals are met, the changes in body shape may not be what was anticipated. An ill-fitting dress, and unhappy bride, is even more likely. There is more uncertainty in the bridal dress business.

As the WSJ reports,bridal studios are trying to accommodate. They are handling more rush orders due to selections made later after gauging weight loss progress, holding more inventories of near-miss sizes and late dress change options, and trying to fit in more last minute alteration requests. All of these adjustments to accommodate the additional uncertainty imply additional costs. As if wedding planning wasn't anxiety inducing enough.

Europe's super power is regulation

noreply@blogger.com (Luke Froeb) — Thu, 23 Apr 2026 22:02:39 +0000

Economist: How Europe regulated itself into American vassalage:

Decades of over-regulating the old continent’s economy left businesses there unable to compete with American firms, which went on to trounce European ones even in their own backyards. ...

The annoying thing is that, taken individually, each piece of euro-regulation is laudable. Yes, Europe should aim for “net zero” carbon emissions by 2050. Of course regulating AI is sensible, lest the robots turn on us one day. Firm antitrust rules enforced by the EU have served consumers well, and so on. But taken together the effect has been a tangle of red tape that has left Europe awkwardly exposed. Efforts are afoot to get to grips with some of the more unappealing dependencies; next month the commission will unveil a “tech sovereignty package”. But it remains to be seen whether Europe can escape its role as a superpower in rule-making, yet a supplicant in everything else that matters.

Addessing Double Markups with the Zollverein

noreply@blogger.com (Michael Ward) — Wed, 22 Apr 2026 16:04:00 +0000

A new paper by Huning and Wolf explore how the Zollverein was formed. A point it makes is that this episode serves as one of history's most dramatic examples of solving the "double markup" trap. Before this 1834 customs union, the German lands were fragmented into hundreds of tiny states, each acting as a local monopoly over its stretch of road or river. As goods moved across borders, every state added its own high transit toll, essentially a successive markup on the wholesale cost. Just as a manufacturer and retailer both adding high margins can kill consumer demand, these "stacked" tolls inflated prices so severely depressed the volume of trade, leaving both the merchants and the states’ treasuries worse off than if they had coordinated.

The formation of the Zollverein effectively acted as a massive vertical integration project for the German speaking peoples. Internal customs barriers were abolished and replaced with a single, uniform external tariff with each state getting a share of the revenue based on its population. This eliminated the destructive cycle of successive markups, reduced final prices, and spurred a surge in cross-border trade. When independent entities in a supply chain (or a geography) stop competing for individual margins and start optimizing for the whole, the resulting efficiency gains can build an empire.

Is Tax Treament of Cannabis Punative?

noreply@blogger.com (Michael Ward) — Mon, 20 Apr 2026 21:29:00 +0000

I am posting about marijuana in honor of 4/20 day.

Marijuana has been decriminalized across many states but is still a as a federal controlled substance as an illegal Schedule I drug. As such, cannabis related firms are subject to section 280E of the tax code. As the Cannabis Business Times (CBT) reports:

... state-licensed cannabis operators are not permitted to make common or ordinary deductions on their federal tax returns. These deductions may include labor, legal fees, marketing, security or banking. With fewer deductions, cannabis operators, particularly those in retail, have an effective tax rate that at times can approach 70% or more.

This tax treatment was originally intended to be punitive and serve as a disincentive to conduct illicit drug-related business. CBT recommends rescheduling cannabis to Schedule III, so that firms would no longer be subject to 280E taxation. Reducing a 70% higher tax wedge would likely reduce prices and increase the quantity demanded. While decriminalized, federal tax treatment depresses demand.

Substitutability Determines Elasticity

noreply@blogger.com (Michael Ward) — Fri, 17 Apr 2026 13:47:00 +0000

The WSJ recently reported on how the Iran war is disrupting energy markets, particularly in Asia and specifically for Liquefied Natural Gas (LNG).

Qatar suspended production even before Iran struck its giant Ras Laffan export facility, causing damage that will take years to repair and delaying its expansion plans. The lost supply is ripping through the global economy.

One ripple has been a doubling in prices in Japan and Korea.

These high prices have led many Asian customers to substitute toward alternatives, including clean renewables but also dirty coal. What was not a viable substitute at $11/BTU has become viable at $22/BTU. Inelastic LNG demand has become more elastic as a result, suggesting that prices may have plateaued at $22/BTU.

The alternatives to agreement determine the terms of agreement: Iran's alternatives are bad and getting worse.

noreply@blogger.com (Luke Froeb) — Thu, 16 Apr 2026 15:30:00 +0000

WSJ:

“Iran insiders are rumbling about the looming economic catastrophe if Washington does not grant sanctions relief that would unlock prospects for economic recovery,” said Burcu Ozcelik, senior research fellow with the London-based Royal United Services Institute think tank. “Without the prospect of economic recovery, regime survival beyond the short term will face sustained structural and popular pressure.”...

“The attacks are not random,” said Kevan Harris, an authority on Iranian economic development and society at the University of California, Los Angeles. “They are targeting parts of the economy that are outward facing, that are bringing in foreign exchange which could be redistributed and directed at basic needs.” ...

Iranian oil that can’t be exported will fill the country’s storage tanks in two to three weeks, which would force the country to shut-in its oil production, data provider Vortexa said. Shut-ins in turn can damage fields and reduce their future output, analysts said. ...

Complicating Iran’s recovery is a host of economic and social ills that predate the recent war, including a worsening banking crisis. Pressure from international sanctions and economic mismanagement pushed Iran last year into an economic unraveling and drove hundreds of thousands of protesters into the streets.

The government’s own internet blackout—now at six weeks and counting—is contributing to the economic damage. Businesses rely on it to communicate with overseas customers and to complete orders, and a tech sector employs tens of thousands of Iranians.

UPDATE from The Free Press

So now is the time to think big. This would entail making three basic demands of Iran’s regime: release political prisoners, end the execution of protesters, and turn the internet back on. In exchange, the U.S. can offer to lift sanctions and unfreeze assets the regime needs just to pay the salaries of government employees.

“The president has real leverage to call not for just a halt in executions, but to seek the termination of the death penalty for certain ‘offenses’ in Iran,” said Behnam Ben Taleblu, a research fellow at the Foundation for Defense of Democracies. He added that a precondition for the next round of talks should be to restore internet access for Iranians, which has been cut off now for nearly two months. In addition, Ben Taleblu said, Trump should demand the release of political prisoners arrested after the June 2025 war and more recently after the national uprisings and state-led massacres in January. He estimates 21,000 Iranians were arrested in June, and that more than 50,000 have been arrested since January.

WH Smith Divisional Incentives

noreply@blogger.com (Michael Ward) — Tue, 14 Apr 2026 15:44:00 +0000

High powered incentives appear to have backfired for WHSmith. In its North American travel retail division, performance evaluation and rewards were tied to aggressive profit targets. These appear to have encouraged managers to recognize income early, particularly from supplier rebates. On paper, the division looked like a strong performer. In reality, profits had been pulled forward, inflating results by tens of millions of pounds. When compensation is tightly linked to a single, measurable outcome like short-term profit, employees rationally focus on maximizing that metric, even if doing so decreases overall profitability.

Managers did not commit outright fraud but made possibly defensible accounting choices. While headquarters wants sustainable profitability, accurate reporting, and long-term relationships with suppliers, division managers are rewarded based on short-term profitability. The result is a predictable reallocation of profitability to where it will enhance compensation. This is a reminder that the problem is not just bad actors, it is often good agents responding optimally to poorly designed incentives.

Profit-Cap Evasion through Vertical Integration

noreply@blogger.com (Michael Ward) — Mon, 13 Apr 2026 23:52:00 +0000

Insurers offering Medicare Part D face a form of profit regulation in which federal reimbursement rates are tied to costs. This provides an incentive to inflate costs. In a new paper, Kakani et al show that firms shifted where they take their profits to an unregulated upstream affiliate. Higher pharmacy prices by affiliated pharmacies represent higher costs to insurers, some of which will be reimbursed through higher insurance prices. Moreover, "We detect larger price increases by insurers that were at greatest risk of exceeding the allowable profit level. More than one-fifth of these higher prices were borne by the federal government."

The effect of California's $20 minimum wage

noreply@blogger.com (Luke Froeb) — Sun, 05 Apr 2026 12:41:00 +0000

From MarginalRevolution:

...prices [of Food Away From Home or FAFH] rose, quantity demanded fell, and that’s what killed the jobs—not robots replacing workers.

In terms of welfare, the bulk of employed workers get an 8% wage increase, a small minority get disemployed. The big transfer was from consumers to workers. California has roughly 39 million residents, all of whom face 3.3–3.6% higher FAFH prices. The transfer is likely regressive — lower-income households spend a larger budget share on fast food specifically. So the policy effectively taxes low-income consumers generally to raise wages for a subset of low-income workers, while eliminating jobs for another subset. Your mileage may vary but I don’t see this as a big win for workers. ...

Changes in top income tax rates over last 20 years

noreply@blogger.com (Luke Froeb) — Mon, 16 Mar 2026 13:50:00 +0000

WSJ:

Democrats warn that tax cuts will slash state revenue and services to the bone, ... Republicans caution that higher taxes will risk an exodus by wealthy residents who create jobs.

Elizabeth Warren's plan to keep poor people in apartments, and out of homes

noreply@blogger.com (Luke Froeb) — Fri, 13 Mar 2026 14:59:00 +0000

The Free Press:

...“Warren is deliberately trying to choke off investment in the construction of new single-family rental properties. This is profoundly regressive. Why is it OK for large investors to build and rent out apartments but not single-family homes?” He adds: “Warren’s policy effectively helps rich people keep working-class renters out of their towns.” ...

BOTTOM LINE: More investment increases supply which reduces price.

How Vail changed the economics of skiing

noreply@blogger.com (Luke Froeb) — Sat, 07 Mar 2026 17:22:00 +0000

WSJ:

Ski resorts used to be weather-dependent businesses — essentially farmers who grew snow. Bad snow year, bad revenue. In 2008, Vail CEO Rob Katz asked a different question: what if we could sell skiing in advance, before anyone knew how good the conditions would be? The Epic Pass was the answer.

The business model is textbook: bundle access to dozens of resorts onto a single pass, price it attractively, sell it in the offseason, and collect nearly $1 billion in revenue before a single lift spins. Weather risk transfers from the firm to the customer. Cash flow becomes predictable. Vail can now plan capital investments, acquire more resorts, and grow — all without watching the sky.

The tradeoff is equally textbook. To make the pass look cheap, you make day tickets look expensive — some now top $300. That's not accidental; it's price discrimination by design, nudging committed skiers toward the bundle. The side effect is crowded slopes and squeezed independent resorts that can't compete with a bundle their customers already bought.

What happens if we raise our capital gains tax?

noreply@blogger.com (Luke Froeb) — Sat, 07 Mar 2026 15:38:00 +0000

Senate Democrats want to raise the top federal capital gains tax rate to 35.8% — which, combined with state taxes, would hit nearly 50% for investors in California or Maryland. That would be the highest rate since 1978. For comparison:

China has a 20% rate.
The European average capital gains tax is 17.9%.

The higher rate will have two effects:

Less investment: A higher tax on the returns to investment means that fewer US investments would have a positive NPV.
Lock-in: since the tax only triggers when assets are sold, investors would hold appreciated assets longer than they should, freezing capital in old uses instead of letting it flow to better ones.

BOTTOM LINE: Investment and the resulting growth double our standard of living every 40 years. This tax would change that.

Benefit-Cost Analysis of California's electric only mandate

noreply@blogger.com (Luke Froeb) — Thu, 05 Mar 2026 23:50:00 +0000

Ted Stroll: The Bay Area Air Quality Management District wants to mandate electric water heaters and says it “will avoid an estimated 37 to 85 premature deaths per year.”

The Santa Clara County Association of Realtors surveyed contractors who estimated costs per home at $43,950 to $224,000. Its figures rely on replacing stoves and dryers as well as water heaters and furnaces.

Let’s pick a random lower figure and assume the Bay Area Air Quality Management District ban will cost each home $12,000. If 120,000 homes need a new water heater annually, the cost will be about $1.5 billion every year. That is a lot of money to “avoid an estimated 37 to 85 premature deaths,” assuming there’s a basis for that claim.

What could we do instead with that amount of money?

One answer would be to spend $1.5 billion annually to remediate homeless encampments. Encampment fires are ubiquitous in Santa Clara County. San José Spotlight reported in February that “over the past year thousands of non-structural fires have been sparked by homeless camps, causing toxic fumes and safety problems for people and property.”

Stroll correctly points out that the opportunity cost of the mandates is whether there are better uses for the money.

QUESTION: Why have mortgage interest rates gone up?

noreply@blogger.com (Luke Froeb) — Thu, 05 Mar 2026 17:19:00 +0000

CalculatedRisk

CCMBS/Treasury spreads, in contrast, widened significantly last month

One reason CCMBS/Treasury spreads have widened since January is that implied and actual interest rate volatility [a measure of risk] has increased ... Below is a chart of the MOVE index, a measure of implied interest rate volatility from options on Treasury securities across the curve.

Voluntary transactions create wealth, but in Canada there are not enough of them

noreply@blogger.com (Luke Froeb) — Tue, 03 Mar 2026 18:33:00 +0000

The Free Press quotes Carleton University economist Vivek Dehejia:

... Canada has long been “the socialist neighbor to the north—an overtaxed, overregulated, overcontrolled economy,” resulting in low productivity and weak growth. ... the prescription is straightforward: lower taxes, less spending, and deregulation.

Why are cancer patients more likely to commit crime?

noreply@blogger.com (Luke Froeb) — Mon, 02 Mar 2026 01:13:00 +0000

Economist: "When your future may suddenly be cut short by illness, prison is less of a threat."

European Tech is growing

noreply@blogger.com (Luke Froeb) — Sun, 01 Mar 2026 19:56:00 +0000

Economist:

Jolted by the deterioration of Europe’s relationship with America, policymakers are redoubling efforts to strengthen its technology ecosystem. At the same time, America and China have made decisions that make Europe relatively more attractive to tech workers and investors. The continent’s established tech companies, though few in number, are now nurturing a new generation of startups. ...

Europe is also getting over its reluctance to let techies make lots of money. ...Now European tech companies are giving out more options...

Mr Trump’s demand that Europe (including Ukraine) do more to defend itself is also spurring high-tech arms-making in a region that had little of it. ...

China, too, is helping inadvertently. Its model of state-directed innovation has crowded out private investment and shrunk VC spending, pushing some towards Europe.

The Rise of Prediction Markets

noreply@blogger.com (Michael Ward) — Fri, 27 Feb 2026 16:29:00 +0000

The idea of prediction markets may have begun as a small research tool in Iowa in the 1980s with trading volumes measured in the thousands of dollars. After a few decades, monthly dollar volume for private prediction markets had reached millions of dollars. Recently, prediction markets have hit the big time. The WSJ reports that Polymarket and Kalshi now do about $3-4 billion of volume in a month. To be sure, this is still three orders of magnitude smaller than the volume of the NYSE or NASDAQ of $2-3 trillion. But this impressive growth indicates broad acceptance.

The idea is simple. If a contract will pay $1 if an event occurs and I think the event will occur with probability P, my expected value of owning the contract is $1 x P or $P. If it is currently trading for less (more) than $P, I can expect to make money buying (selling) the contract. With enough potential traders, the price being quoted is "the market's" best estimate of the probability of the event. Traders' profit motives drive the price to the "the market's" expectation.

Non-traders, perhaps ignorant of how new information will affect the probability, need only look at how much the price has changed to infer what more knowledgeable individuals think of the information. Prediction markets harness "the wisdom of the crowd." The growth of these markets is an indicator of how valuable this information can be.

Economist: the world is more equal than you think.

noreply@blogger.com (Luke Froeb) — Tue, 24 Feb 2026 18:59:00 +0000

Economist:

[in 2000], the rich spent about 40 times more than the poor; today the figure is closer to 18. ...

But in many countries where populist politicians lament that poor folk have been left behind, consumption gaps have more recently narrowed—suggesting that lower-income households are catching up. This has happened quickly in Spain and Greece, and also in Britain and France. Inequality can be gauged in different ways. On consumption, it’s mostly good news.■