Nova workboard

a blog from young economists at Nova SBE


For Compulsory Vote, for Democracy

Portuguese municipal elections have passed, and worrying (yet but not surprising) turnout numbers have emerged. This time abstention stood at, roughly, 47.4% of the electorate.

Among several problems, this brings serious trouble regarding legitimacy of government, and a huge problem of unaccountability to both voters and government. These two circumstances together can undermine any democracy, and should be counteracted actively, in order to avoid democratic instability.

I believe that part of the solution relies on compulsory voting. And I consider that there are arguments of economic, moral and political nature supporting this.

The majority of the past literature concerning voter’s turnout seem to agree that the fraction of the population that does not vote is biased. The conclusion presented many times is that choosing not to vote is not independent of the socioeconomic condition, or of the level of education, in the sense that abstention is higher in groups of people that studied less throughout their lives. One of the problems that arise out of this, is that as turnout decreases (which is actually the trend in last decades, in Western democracies), increases the inequality in representativeness, thus increasing the probability of the government representing the interests of a minority. This is particularly serious if we think that political parties, as votes maximizers, will worry about measures that please their electorate. If there are minorities that vote less, the measures that benefit them will be less appealing to political parties, which will make these minorities less interested in voting, creating a cyclical effect of marginalization.
Making everyone a potential voter will oblige political parties to take into account all sectors of the society. The vote is one of the few situation in which all agents have the same power, it is imperative to use it to counterbalance inequalities!

But turning vote mandatory can bring another positive effect. It shifts people attention from “Will I vote?” to “In whom will I vote?”. And this makes parties worry about actually informing people, instead of trying to get people to vote. Gains in efficiency do not end here, if everyone is supposed to vote, then Government has incentives to remodel the electoral system, in a way to make possible for everyone to vote. This will launch the debate regarding electronic vote and other new alternatives. Long queues to vote, discourages people to do it. In Portugal, for example, is a massive bureaucracy to vote, if you are outside of the country.

Moreover, creating the notion that voting is not only a right, but a duty as well, can create a increasing democratic momentum in society (that can, of course, take more than one generation to happen), up to the point that voting becomes intrinsic. It will be inherent to our democratic system. These dynamics will make people increasingly interested and informed about who are they voting for, and thus, becoming more vigilant and demand better politicians. This could give rise to new political parties, new independent political or civil rights movements and foremost, a greater involvement from citizens!

We are not trying to compel anyone in voting for a particular party. The option to vote in no one would still be available (may it be blank vote, spoilt vote, voting for “none of the above” or other option of this nature). An example of a successful implementation of compulsory voting is Australia, which introduced this measure in 1924, and has henceforth had its turnout in every election at around 95%, although the punishment for not voting is low ($20).

Having a more social-engaged and politicized society won’t be achieved by compulsory voting alone. Complementary measures have to be taken, such as continue to fight for a more informed population, with higher educational standards. However, the benefits arising from this measure are, I believe, far superior to the disadvantages that may ensue.

The right to Democracy entails the duty to express ourselves about her, yes to compulsory voting!

Sérgio Rocheteau #620

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Fiscal Illusion

It happens that in several economic fields, analyses are based in microeconomic tools and way of thinking. We try to evaluate changes of one single variable keeping everything else constant. However, reality is far from this conceptual idea, and people’s preferences do not vary in terms of one thing only, but according to their perception of the whole environment surrounding them.

This is why it is always so difficult to derive conclusions about the effect of taxation on individuals and on their behaviour and choices, because we cannot just rely on the results of static analysis on some particular tax. It is important to keep in mind that individuals and society are not completely modelled and predictable.

I come here today to introduce the topic of fiscal illusion, which means that the average people, the electors, do not have perfect information about the costs of public action. The problem arises because the relation between public services and its financing is not obvious for citizens. Three major points contribute to this issue: the progressive taxes, because the ones who pay are not the ones who benefit the most; the strong presence of indirect taxes, creating an anesthetic feeling as to the total amount of taxes paid in a given period; and also the fact that the fiscal system in place is very complex.

These three motives prevent people from assessing the real cost-benefit of their choices. This lack of information promotes fiscal illusion, which can suggest an inefficient or unfair fiscal system, and ultimately an excess level of public intervention. As a consequence, if the electors do not understand the costs derived from government’s decisions, they will demand greater levels of intervention, relative to what they would ask for if they knew the true and higher costs required.

Some authors argue that, despite the sub-perception of the costs, there is also a sub-perception of the benefits resulting from public intervention, and so there is still the possibility of reaching efficient choices. Nevertheless, we have been witnessing that the growth in the public sector has been associated with the strong increase in indirect taxation. Besides, it is likely that this growth would not have been possible through an increase in direct taxation that would more vividly meet the conscience of people for the implicit costs of their choices, and make them refuse the rise in public expenditure.

 

Carolina Conde Rodrigues (#622)


What is the impact of commuting costs in unemployment?

In futuristic/ sci-fi movies, it is not uncommon to see people leaving from one place and popping out in another place instantaneously. They save time and money in transportation, and generally the time that the hero saves in using teleporting lets him save the world in the last second.
However, (for the disappointment of many people), scientists claim that teleportation is impossible. This means that we will probably continue to have the need to use some form of transport to move from one place to another, as we have done until now.

One example of the need of transport is the daily routine of going from home to work, and from to work to home. People waste time and money in this routine, simply because it is not free to get to somewhere, and generally people don´t work in the same place as they live.

And we have to keep in mind that a person´s decision to work or not is mainly a decision on the occupation of time. People choose to allocate its (precious and scarce) time (T) between work and leisure, and the most obvious factors that play a key role in that decision are the wage rate (which corresponds to the opportunity cost of leisure, w), the amount of income available (budget constraint, represented in graph 1), its preferences on consumption of goods (that are paid by their income) and leisure (represented in graph 2), any fixed costs that they have to incur to go to work, and any fixed income whose source is not work (rents, dividends,…, represented by letter V).

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                                                                                                    Graph 1

 

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                                                                                                     Graph 2

 

The final decision will depend on how much a person is willing to accept to forego its last hour of leisure (the reservation wage) and how much wage employers are willing to pay for that hour of work (the market wage). If the reservation wage is bigger than the market wage, then the individual will choose not to work. In the other way around, if the market wage is bigger the reservation wage, he will choose to work.

If the person works, he has to spend K euros on transports. So his budget line is the straight line starting at the point (T, V – K ). If he does not work, he does not have to incur in commuting costs. So the point (T,V) (No work) is also achievable.
The individual would be better off at the “No work” point than working H hours at the tangency point, resulting in a higher utility level.

This mechanism that gives the incentive to persons to stay at home rather than go to work becomes more visible when they work few hours per day, when the commuting costs is higher and when the wage rate is lower. To the people that continue to go to work, their income available to spend in other goods will be lower, resulting in a lower consumption.

Image        Graph 3

 

And in the last couple of years in Portugal commuting is getting more and more expensive, either because the introduction of tools in many highways, either because the increase in the tickets price in public transports. This possibly resulted in fewer people participating in the workforce due only to this mechanism, and had a negative tendency to the employment level, which in the last years has been decreasing.

This is also true in the other way around. If a person pays less than the real cost of commuting (which generally happened in public transports) then there is a positive tendency on the employment levels triggered by this mechanism and an increase in labor competitiveness, although an analysis on the opportunity cost of the government money spent in this programs is needed to evaluate the full impact of this kind of measures.

This results shows that measures to increase the efficiency of means of transportation and public policies on public transports that result on less costs for the consumers and for tax payers are an important vehicle to help society increase its material well-being and to reduce the unemployment levels.

Bruno Dias, # 670


Is there room for irrationality in models?

The basics of Microeconomics, as it is teached today in an introductory level, have not changed for a while. These principals are solid since the late 19th Century, with the “Marginal Revolution”. There is a common consensus regarding this, the Neoclassical Model for Microeconomics. It is based in 3 main principles: Rational preferences and expectations, maximizing agents (utility and profits) and full information.

Although all of these assumptions have been challenged to some extent, I feel that we still rely on perfectly rational agents a lot more than we should.
Irrationality of agents has been widely studied, more deeply since the 60s, with great contributions from cognitive psychology and with the rise of Behavior Economics.
The whole point of models is a trade-off between simplifying and being able to extract meaningful conclusions. So we don’t want a very, very simple model, since it will we too detached from the reality, but we don’t want a too complex model as well, as it will be too specific, and we won’t be able to draw conclusions with policy implications. So does it make sense for us to try to include some degree of irrationality in agents?

Agents are found to deviate from “rational preferences” in many different ways. Some of these ways are more obvious and some efforts have been made to include some of these concepts in models.

One of them is the idea of time-inconsistent preferences, or present bias which the biggest implication is the violation of the permanent income hypothesis. Although it is easy to understand why I would prefer a euro today than a euro tomorrow (positive interest/inflation), it is not very clear why I would prefer a cake today than a cake tomorrow. More, if have 2 cakes today, I probably prefer to eat a little more than 1 today, and a little less tomorrow. This is very well document by Walter Mischel in his experiment with kids. He offered 1 marshmallow to them, and said he would give them a second marshmallow if they waited roughly 15 minutes. Only about a third of the kids could wait that longer. There are many examples in our life of this (delaying study, delaying going to the gym, saving too little money to pay our debts), and has been represented as a “game” between the present and the future self (Daniel Kahneman’s idea of Two Selves). The idea is that when we take actions, we don’t take future’s interests into account accurately, so we value more consumption today then consumption 5 years from now. But when I get to this 5 year time, I will be worse-off than I could, due to this bias.

This has been taken into account in some models, including a impatience factor, or hyperbolic discounting (For example, a Utility function such as U= C1+C2/(1+µ); where µ is a measure of how impatient I am. Of course this is very hard to measure, but with some revealed preferences techniques we can have a fair proxy.

Other efforts have been made to integrate some sense of fairness in social preferences. Agents, as we present them, are self-interested maximizing pieces of the market, but it is undeniable that most of them have some tendency towards social fairness. This idea has been integrated in some models (Rabin Model), with some influences of psychology and game theory.

So can we relax the perfectly rational agent assumption? I think with the raise of behavioral and experimental economics, this is already being done, step-by-step. And its policy implications are huge. We know for a fact, right now, that it is very different to say to a patient that he has 30% of probability to live or to say that he has 70% of dying (called framing), although these are statistical synonyms. We know that giving monthly food stamps to people will cause them to decrease consumption over the month, due to present bias. We know that, even regarding econometricians and statisticians, giving some irrelevant numbers, will cause them to judge towards this value (anchoring effect). We know for a fact that many people cannot help but be influenced by sunk costs. People still play in the lottery, although economists call this the “Tax on stupidity”. The truth is that the Homo Economicus does not exist, and if we want to have significant and efficient policy results, we have to embrace a big interdisciplinarity between Microeconomics, Psychology and Behavioral Economics.

Sérgio Rocheteau #620


Bundling – The Microsoft example

In the second half of the 90s, Microsoft released its browser Internet Explorer, incorporating it into its operating system and providing it for free. Considering this actions anti-competitive, Netscape (its competitor) decided to lodge a complaint to Justice. Thus, the Justice Department has started an investigation which led to a lawsuit against Microsoft accusing it of unfair competition. This situation was based in a bundling strategy which is generally adopted by companies to join products or services  in order to sell them as a single combined unit. The issue was whether Microsoft was authorized to join the IE with Windows.

Microsoft stated that the merger between Microsoft Windows and Internet Explorer was a result of innovation and competition and both were the same product available for the consumers for free. However the Department of Justice disagreed with this definition.

According to what happened with Microsoft, we can assumed that was a situation of mixed bundling, that is, Microsoft sold a free pack with its operating system and Internet Explorer, however it is possible to buy both separately but at a higher price. In his defense, the company claimed that the IE couldn’t be sold separately because it was part of the system and without it the performance would be compromised. For Microsoft it’s feasible to provide a mix bundling and so give the possibility to the consumer has the IE once he has the computer. This situation is more productive for the consumer, because without the IE consumers can’t have access of internet and doesn’t have the possibility to surfing in the net. Even they don’t want this specific browser, it’s necessary to access it in order to download another one.

This practice is often adopted to guarantee an improvement of loyalty of costumer and greater knowledge about the product. Additionally, this strategy provides an opportunity to obtain costs savings. A company can reduce its costs of production, transaction and exchanging information, enabling efficiency of scale. Due to economies of scales, it’s easier to predict the customer preference for package than products that are sold separately.

Nevertheless, this case it’s a little bit different of what we are used to see because Microsoft provides the IE for free. Microsoft considered that their profits were not dependent of the exclusion of competition, but dependent on the goals to make the laptops more attractive and thus, increase the sales of their operating system. 

There are many opinions that emerged throughout this case, many of them divergently. In fact, while Microsoft thought it was advantage to consumers to provide IE for free, most people believed that it would benefit them just in the short term. Forcing Netscape to provide its browser for free it’s such an example. However, the consumers could suffer a competition reduction not only at browsers level but also at an operating systems and so it could result into an increase of prices or a reduction of investment in Research and Development in the long-term. After that, the consumers were in disadvantage because the probability of emergence of new competitors reduced. Concerning short-term gains for the consumer, they could be limited since the provision of IE for free allowed to keep the price of Windows at a higher level than would be expected. 

 

Rita Cordeiro #672


Tax rebate – best way to introduce a carbon tax?

The idea of launching taxes on pollution is far from being a innovation.

Arthur Cecil Pigou came up with this idea in 1920, observing that the market does not take into account the full costs and benefits of production and consumption. There is unintended consequences from market transactions, and they are called externalities. OECD defines externalities by referring “to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided”. It is important to refer that third-party that is involved do not choose to incur that cost/benefit, but still has to bear with it.

Pollution is one example of a negative externality, and I will focus specially in one type of gas that causes it. Carbon dioxide (CO2) is the primary greenhouse gas emitted through human activities and scientists say that it is the main responsible for what is being called Global Warming (the steady rise in the average temperature of Earth’s oceans and atmosphere). There are many negative consequences of global warming, and despite the different scenarios that different scientists present to the society, there are no doubts that global warming will and is having social, biological and economical costs.

Therefore, the total costs that the consumption of goods that had in their production process CO2 emissions are not only what the consumer pays for them but it is also necessary to add the cost of the externality. The total costs economists define them as social costs.

What happens when only the private cost is recognized by the market? As consumers, we make our purchase decisions based on the price that is given by the market, and choose to consume more of the good that we normally would consume if its price reflected the social cost, instead of only the private cost. In equilibrium, the society will consume (QP), but if the cost of the externality was reflected in the price, the society would only consume (QS).

                Pigou though that, if there was the possibility to increase (artificially) the price of goods that produce negative externalities to compensate its costs, then the market would reduce the quantities of the good transacted, and the society would be better off. Pigou monetized the externality, and that will be included in the production and consumption decisions!Image

                Although this instrument had been used several occasions by municipalities and regions around the world, its popularity increased in the ninety´s. Environmental awareness increased a lot (Kyoto Protocol was thoroughly negotiated and discussed in that decade, and several international organizations published reports about human influence on climate change). The responsible were the Nordic Countries, for a movement that is called the Green Tax Reform. Sweden was the first one, imposing a carbon tax and reducing at the same time the income tax. Basically, the Green Tax Reform is usually based in the Double Dividend hypothesis. Countries increase the environmental taxes and decrease labor taxes (“tax waste, not work” and “tax bads, not goods”, it’s their moto). Countries lose competitiveness in capital-intensive industries and gain competitiveness in labor-intensive industries, but most of all they force the market recognize the costs of pollution, and by that help society become aware of costs that otherwise each individual would not take into account.

                What happened to the average consumer with the tax rebate (income collected by the environmental taxes being returned to consumers by a decrease in labor taxes) and what he could have happen if there wasn´t a tax rebate?

                If we analyze what happens to the average individual in a static way and keeping in mind that the utility (a measure of well-being) that he think he gets from the consumption of products with negative externalities to the environment doesn´t take into consideration the environmental costs that he is imposing to others and himself in the future, we conclude that the goal of the measure is achieved (the consumption of goods with negative externalities decrease), but with the tax rebate the impact in well-being of the average individual is minimized! Why? Because the other goods are now relatively cheaper than the pollutants, giving the incentive for consumers to switch for environmental friendly products. The final situation is characterized by the letter C, and if there wasn´t any tax rebate the consumer would be worse-off (B). In fact, the consumer in the end can be better off, because the negative income effect caused by the tax is offset by a positive income effect of the tax, leaving only the substitution effect.

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               So this measure can be a very powerful tool to introduce to the society a carbon tax. Public opinion would be more favorable to the introduction of the tax, society can benefit by the improvement of the environment, and labor-intensive companies would gain competitiveness in the market.

Bruno Dias, #670


Can we really buy that?

The Law of Demand states that “if the demand for a good increase when income increases, then the demand for that good must decrease when its price increases” [1].

Although this fundamental law is a robust law for most goods it falls short to explain some luxury goods, for each when price increases demand increases. Such a good is called Veblen good. This relationship between price and demand makes the demand curve to slope the reverse way from a normal good. It’s even possible to find some Veblen goods that under a certain price level behave like a normal good. However once their prices go up the demand curve slope changes, making the demand for this good behave as one described as Veblen goods.

Untitled

An excellent example of this behavior, described in the chart above, is the Lacoste case in the 80s. Their product was cheap and abundant, having a demand as depicted under P1, therefore a normal good. The company changed the vision consumers had over their product by setting higher prices, as well as reducing production, making their product that was once a normal good, a luxury good [2]. Consequently, shifting the slope of the demand curve, as depicted over P1. This behavior of demand can be explained, for instance, due to the fact that satisfaction derives not from the utilitarian attributes. This phenomenon maybe explained by the audience reaction to the wealth displayed by the purchaser. [3] Furthermore consumers will be willing to pay a higher price then they would for a functionally equivalent good.[4]

Some argue that this approach is too restrictive and lacks generality, once it explains consumption only through the perspective of the top of social hierarchy. Additionally, that consumers do not display wealth conspicuously but in other manners and their behavior is no longer shaped by positions of social class but by lifestyles that cut across the social hierarchy.[5] Despite all the criticism around Veblen’s work it was, and still is, an important contribute to more complete knowledge of consumers choice. Most of all, gave us the chance to consider consumers choice not only as a utility maximization process but as a process that can be influence by society.

For instance, consider the iphone-n, a good that we can classify as a smartphone, whatever is his n. A product that, no doubt, has a desirable design, it comes with the latest technology — powerful processors, advanced graphics, and fast memory. But are those the reasons why we as consumers buy it? Although, it has great characteristics, I would say no matter the technology inputs, the new apps or features, an iphone will always arouse the consumers’ interest. In my view, when consumers buy this good they don’t only buy the product, and utility that they derive from it, but the image that comes along. The ownership of this product is a display of prosperity, a social status affirmation.  Thus, consumers don’t buy this good only with the purpose of utility maximization but simultaneous to achieve a certain social status by signaling wealth through conspicuous consumption.  Furthermore, I consider safe to state that we can observe a bandwagon effect in the consumption of this good. Consumers buy it partially due to a trend, a general willing to buy a given good that allows one to be identified as a member of a certain class, or group.

This phenomenon is possibly clearer when we consider a country with big asymmetries in income distribution. A country where only rich consumers are able to afford goods with high prices. The same goods that have prohibitive prices for poor consumers, due to their extremely low income. I believe that the purchase of an iphone, in this situation, correspond not only to a maximization process, but also as a way to signal a certain position within that society. It allows consumers to distinguish themselves from another group or class that won’t be able to purchase the same good due to budget constraints.

After all, the question we should ask is if Apple releases tomorrow iphone-n with unknown features, and therefore unknown utility, what would be the demand for this good?

[1] – Hal. R. Varian – Intermediate Microeconomics

[2] – http://www.economist.com/blogs/freeexchange/2007/07/giffen_v_luxury_goods_discuss

[3] – Roger Mason – Modeling the demand for Status goods – 1992

[4] – Laurie S. Bagwell and B. Douglas Bernheim – Veblen Effects in a Theory of Conspicuous Consumption – 1996

[5] – Andrew B. Trigg – Veblen, Bourdieu and Conspicuous consumption – 2001

 

 Tiago Branco

#664


Bolsa Família: Welfaring out of poverty

 

Bolsa Família is a social welfare program in Brasil, part of a bigger network of measures to end poverty called Fome Zero, introduced by the past Brazilian President Lula da Silva. Although it now has been expanded by Dilma Rousseff with Brasil Sem Miséria program, I focus on Bolsa Família itself.

The mentioned program is a CCT (Conditional Cash Transfer)  which are well-know programs for (development) economists, where you usually have a transfer for some type of individuals, conditional on them doing something (it could be, taking your children to the hospital regularly, taking them to school, and so on). This conditionality is needed to avoid misusage of the cash transfer. Bottom line it is used to align the incentives of parents to make sure that their kids really go to school.

Bolsa Família is based on education, and in short-terms it gives a certain amount of money to poor families that make sure their children: Go to school; Skip little or no classes at all; Are vaccinated.
Although CCTs are very common in Latin America, there are not many projects of this kind that have been analyzed systematically and methodologically, ex-ante and ex-post, so this one is perfect to be considered from a microeconomic perspective. Moreover, it is the largest one of its kind, in the world. For example, Hoffman, 2006 (in portuguese) studied how much the total inequality decrease in Brazil, between 1997 and 2004, was due to this program, and concluded that in many regions it was close to 28%. In the poorest region, Northeast, this effect reached 66% of the reduction in inequality, and could even reach higher values (87%) if we consider a short time period. In what concerns fairness the program did very well: It decreased poverty and inequality dramatically.

The problem can, however, rely on the efficiency of the program, in pure economic terms. This type of programs are not Pareto Efficient, for sure, since the money that is given to these families comes from somewhere, usually taxation, so not only some people have now less money than they had, but there is some deadweight loss (excess burden) associated with the taxes, so we lose some feasible and optimal resource allocations. The first thing that we can argue is that not only is redistribution desirable, but when you have 8.5% of population below the extreme poverty line, even with the cost of some DWL, we will end up in a higher Social Surplus level than before(this of course, underlines some marginal utility of money assumption, i.e. someone very, very, very poor, will get more utility from 1 extra euro, than Bill Gates will. Controversial assumption). However, I think that a 2 period analysis of this program is too limited. The biggest advantage of CCTs of this kind is its investment in human capital. Most of the children that are going to school are the first generation in their families to do so, and as we know, educational level is highly correlated with wages, so these kids will be, on average, better-off than their parents. These repeated but limited transfers (not one-time transfers, but an extension of it), can take, and took out, millions of people out of poverty, and this effect could persist for generations, so we end up with a inter-generational higher utility level! Not to mention side effects such as: the efficiency gains from having more educated people in the labor force; decrease in crime rates due to less poverty and less educational dropout, and so on and so forth.

These lump-sum transfers could help millions of people escaping the so-called poverty trap, while helping Brazil getting more competitive.

Sérgio Rocheteau #620


The Tragedy of the commons

There are some reasons that make government intervene in the economy and one of them is to correct the market failures. We have a market failure when the market does not lead to economic efficiency. In order to avoid welfare losses, the government should intervene to increase the efficiency.

Public good are an example of market failure. They are services which are clearly in demand, but which must be provided collectively by the Government. Public goods have the following characteristics: Non-excludability- it’s not possible to prevent people from enjoying its benefits and non-rivalry in consumption – consumption by one person does not reduce the availability of a good to others. Everyone consume the same amount of the good. Therefore, public goods like national defense, street lighting and beautiful gardens may not be provided in a free market.

 

The Tragedy of Commons gives us an example of open access resource problem, that is, it refers to the tendency for common property to be overused. The tragedy of the commons is the depletion of a shared resource by individuals, acting independently and rationally according to each one’s self-interest. “Commons” can include the atmosphere, oceans, rivers, fish stocks, national parks and even parking meters. We can understand this notion with an example of a group of shepherds who own a bunch of animals in a public land. Each shepherd decides to buy one more animal in order to increase his own profit. However, all shepherds do the same and which leads to an overpopulation of the land with scarcity of pasture. The tragedy of the commons is also known as a free rider problem.

In order to avoid this problem it is necessary to find solutions. Private property is such a mechanism. If everything that people care about is owned by someone who can control its use, then there are no externalities. Therefore, the market leads to a Pareto efficient outcome. Other example is to formulate a rule about how many cows can me grazed on the land.

Rita Cordeiro #672 

 


Apple accused of forming a cartel

The prices of e-books were fixed through a wholesale model. This model states that the retailers are the owners of their e-books, and so they choose the price alone (retail price).

Amazon was the first company to offer a large variety of e-books, and with the launch of Kindle, the prices were about  $9,99 per e-book. Other retailers, in order to compete with Amazon, tried to match this price.

The benefits derived from this model were practically absorbed by the consumers, who were able to buy from every retailer the books they wanted at a reasonable price.

However, publishers feared the e-book market would affect their long-term profit, due to the fact that the demand for printed books would decrease or even cease to exist and due to the fear of being pushed by retailers to drop their prices even lower.

This forced the publishers to act together in order to ensure their own survival by forcing Amazon to raise their prices.

Despite the efforts, it was only with the entrance of Apple in the e-book market that they achieved the result intended.

The cartel formed by Apple and the publishers decided to change the wholesale model to an agency one. This differed from the previous one, in the sense that publishers were the ones fixating prices, and it was established that 30% of the value would revert to Apple.

Amazon tried to fight back, but with the launch of the Ipad, and the realization that all publishers were acting together, it had no choice but to give up and accept the agency model.

This resulted in higher prices in the e-book markets, causing consumers to loose the benefits they had before.

Let’s consider now a general equilibrium model, which is divided in two sectors: a sector with the e-books/books and another sector representing all the others.

In order for the economy to be efficient in consumption, and a Pareto Optimal, the choice bundle must lay in the contract curve, when both indifference curves are tangent and MRS of one agent is equal to the other. This means that the amount the consumers are willing to give up the same amount of good 2 in order to increase the quantity of the other by 1.

Efficiency in production occurs when the MRTS of both factors of production are the same.

Adding both conditions, it comes that equilibrium of production and consumption is given by MRS=MRT.

This is illustrated in the picture; the optimal choice is point A since MRS=MRT.

With the increase in the price of the e-book, the MRS of increase as well since MRS = pebook / pothersector.

ImageAs MRS=MRT, when MRS increases so does MRT, which means that the marginal cost of producing e-books/books will increase (MRT=MCebook/MCothersector).  

This is linked to the fact that the publishers practice such a high price for the books, which leads to a decrease in consumption. This decrease in consumption will, then create an incentive for writers to stop writing, since no one will buy their books.  

To sum up, this decision of Apple to form a cartel and increase the prices leads to negative effects: the welfare loss of consumers due to the more expensive e-books, and the reduction of writers due to the fact that the demand for their product decreases.

Maria Almeida

#637


Conspicuous Consumption

In consumer theory we tend to forget that consumers display a very broad pattern of behavior that in many cases falls out of our straightforward models. One of these cases is so called conspicuous consumption which has been defined as “the spending of money on and the acquiring of luxury goods and services to publicly display economic power”. In essence it consists in buying to show off (signaling if we want to get technical)

Generally 3 effects have been identified (related to conspicuous consumption) that have an impact on the way we model consumption choices: The bandwagon effect, the snob effect and the Veblen effect.

The bandwagon effect consists in an increased preference for goods which other people also have, and the more people have it the more the individual consumer wants it. The Snob effect is the exact opposite, the less a good is owned by other people the more the consumer wants it. Finally the Veblen effect relates to price, the pricier a good is the more we want to consume it to signal how wealthy we are.

So how exactly does this behavior falls out of our traditional models of consumption? In 3 beautiful words: Endogenous utility functions. Here we were thinking preferences are “given” and apparently they can also be a result of the way goods are consumed in a society. There have been attempts to model this behavior but not much attention has been devoted to this subject. One way is to model “status” as a good one can acquire by buying certain goods. One other way (related to the Veblen effect) is to attribute 2 prices to a good, the market price and the conspicuous price or the price that other people perceive the consumer has paid. When there is more information about prices those 2 will tend to be equal.

The reason all of this matters, other than trying to achieve a comprehensive consumer choice theory, is externalities. When a consumer buys a positional good (a goods that gives him status) someone else will lose status (and therefore utility) from the current goods he consumes and has to increase his expenditure in positional goods. This is commonly known as “keeping up with the joneses”, a zero-sum game if you will where no one benefits.

All of this may translate into public policy measures that are able to raise revenue without creating several distortions, for example, through taxes on luxury goods or through the provision of non positional goods such as public goods like health and education.

 

Jorge Moreira dos Santos nº616


Models, Schmodels

In the standard microeconomic model on consumer’s preferences we tend to assume certain general characteristics that we believe are in accordance with the real world.

We state that preferences are convex, meaning that consumers prefer a “mixed” bundle of goods rather than more of a single good, that people always want more of a good than less (non-satiation) and preferences are complete, meaning the consumer can always rank goods from the least to the most preferred.

But what if these assumptions are fundamentally flawed? Behavioral economists have been working on these issues and have concluded that people’s choices are not as clear as the models generally assume.

For instance, in several studies researchers found that people have an innate sense of “fairness” and they make decisions that contradict the general assumption of rational self-interest. Other studies found that there are time inconsistencies in preferences, meaning that people discount their future selves welfare much more than what is generally assumed. One clear example of this is tobacco consumption (this idea is brilliantly discussed by Gregory Mawkin in is article “Can a Soda tax save us from ourselves?”). Consumers are also poor at judging their future preferences. One study gave students the opportunity of choosing a set of snacks for consumption for the following three weeks while giving others the choice of choosing them on a daily basis. It found that those students who had to choose all the snacks at once tended to select a higher variety of different snacks than those who could choose daily. Meaning that the first group probably assumed that it would want to diversify its choices while actually consumers  seem to stick to a set of standard choices. In microeconomic terms this would mean that the moment of consumption has a high influence on preferences.

One particularly interesting study (Iyengar & Lepper) analyzed the impact of choice on consumption. It gave consumers the choice to try a set of 6 or 24 jams and a discount voucher. Afterwards they had a voucher to spend on. It found that those who were given the choice of 24 jams were much less likely to make a purchase. When given too many choices consumers were overwhelmed by the information and their consumption actually went down.

How is all of this relevant? In a context where economists all over the world are rethinking their approach to the science, following the 2008 financial crisis these studies could shed a new light on how policy makers can avoid repeating the same mistakes by giving us new, improved models to think about the world!

Jorge Santos nº616


Public Goods: a global challenge

In economics, the tragedy of the commons is the depletion of a shared resource by individuals, acting independently and rationally according to each one’s self-interest, despite their understanding that depleting the common resource is contrary to the group’s long- term best interests. The concept is often cited in connection with sustainable development, meshing economic growth and environmental protection, as well as in the debate over global warming. “Commons” can include the atmosphere, oceans, rivers, fish stocks, national parks, advertising, and even parking meters.

In view of the ecological crisis, the knowledge economy, new forms of governance and production, reflection on the commons has become essential. Long ignored by economics or law, it is yet in its infancy.
The question of the public goods and commons have long been ignored by economics, politics, law, social movements, and yet is becoming a key challenge of this new century. In view of the ecological crisis, the knowledge economy, new forms of governance and production, the notion of common are just beginning to be explored.

1. Theory of the commons
The main feature of the commons is that anyone in a group of people can use and give a particular resource without that it cannot be appropriated and exclusive control the part of an individual. In other words, ” are common goods on which no social unit (individual, family, company) has exclusive rights, whether property rights or rights of use. This is an example of communal property (wood or pasture) of medieval Europe that served as historical reference to this debate (1). ” In the Middle Ages , in fact , land was open to all crops : anyone could go collect firewood , mushrooms, farmers could graze their sheep … This is the thirteenth century in England that the king John and the barons appropriated exclusively these common , this policy of enclosure caused large popular movements that gave rise in 1215 with the Magna Carta and the Charter of the forest , a new law regulating the use.

The notion of joint returns to the front of the scene including being a famous critic from the biologist Garrett Hardin in an article entitled “The tragedy of the commons”, published in 1968. Considering common pastures where shepherds are trying to feed the greatest number of animals, significantly reducing the amount of grass available, he concluded that the free use of common led to the ruin of all. For Hardin, the commons are therefore only available resources, or the great merit of Elinor Ostrom have shown that this design was based on a common abstract design with little to do with the actual common collectively managed for millennia (such as irrigation or fisheries) . It is common that are linked to communities, and therefore a sense of community, where people communicate and negotiate in a perspective that is not confined to the immediate interests.

Indeed, the subject of governance that is imposed either by the market or by the state, the concern of the commons is always reconciled with the right to use the conservation of resources. However, this reconciliation, as shown in the management of complex public goods (such as irrigation canals) , is made possible by shared by members of the community values. These values are used to overcome the difficulties of management, convey collective knowledge and «awareness of the importance of adaptability and flexibility of the institution (2) .” Production of public goods is therefore a social and political construct that depends on the arbitration community between what she can or will endure for the benefit of all and the production of goods free access. This is the community to set the cursor: the road may be, for example, free access and free and open access highways but pay. 

The commons can be classified into four categories according to two parameters: the former is open to all or only to a specific group character. If air or road networks are open to all, this is not the case of pastures or irrigation networks that are restricted. The second parameter specifies whether the system is regulated commons: if the air we breathe is not regulated, it is different from the air is rejected and pollution, i.e there a range of regulatory commons will vary for many reasons (accessibility, political choices, etc. .) . The rules for the governance of the commons are varied but in all cases, no higher authority can dictate. They regulate themselves by creating their own control systems. According to Elinor Ostrom , encourage better cooperation through institutional arrangements adapted to local ecosystems rather than trying to run everything from a distance, which does not prevent governments or international organizations to play a decisive role in the recognition of commons.

2. News of the commons
The theory of public goods has regained news particularly since the late 1990s, when the Internet was seen as a new joint. Unlike the digital common property ( also considered ” common knowledge “) with the natural common good, the use of one does not undermine the possibility of use of the other . While common knowledge may seem like unlimited, it nevertheless they are likely to be the subject of new enclosures, including with the private appropriation of knowledge and methods ( software patents or knowledge) . Knowledge, although intangible, is thus one of the main issues that revived the debate on the commons. Pierre- Joseph Proudhon and Victor Hugo had already argued in the nineteenth century that the production of ideas is possible only to the extent that the authors drew them through the company. For them, the text becomes a common good when the author, who loses his copyright in favor of a public right, distributes its text. Today, this utopia seems to be possible from the time when knowledge is decoupled from its broadcast medium that is freely accessible through the digital form. Thus develop many platforms open-source, open scientific knowledge with the creation of the Public Library of Science in 2000 and the open access journal Biology, Creative licenses commons ( 3).

The advantage put forward regarding these common is to allow innovation to move without colliding with vested interests. The commons, therefore, are conducive to strong growth in non-market production, especially for the information economy and culture via the Internet. Software, drugs, genes, agricultural seeds are however subject to a struggle between those who want to make universal common good and those who would take ownership thanks to patents. This poses many problems, such as the patenting of life. John Sulston for example, Nobel Prize in Medicine in 2002, provides the following light on the link between common good and genome: The genome sequence is a discovery, not an invention. Like a mountain or a river, it is a natural object that already exists, not before us, of course, but before we realize his presence.

In my opinion, the earth is a common good, and even if we erect barriers, it is preferable that does not belong to anyone. If an area becomes important because the landscape is particularly beautiful or because it is home to rare species , then yes, it should be protected as a common good “(4) . Here Sulston raises particular problems for the common good as a natural or human production as it is actually a good product can be a common property such as roads or some digital goods.

Other species of property are likely to reach common, which is not without cause controversy in the political, economic and legal implications. In a context of globalization, the economic crisis calls into question the ways of managing the property, where the environmental crisis calls for new management of natural assets ( such as water) , and where the crisis the technique requires the composition of new relationships with the living space and the reflection on the commons becomes unavoidable.

(1) Daniel Mate , “Biodiversity between private ownership claims of sovereignty and international cooperation,” Sustainable development and territories , File No. 10 “common goods and property,” http://developpementdurable.revues.org/index5253.html , posted March 7, 2008 .

(2) Giangiacomo Bravo Beatrice Marelli , “shared resources” , Journal of Alpine , 96-3 , 2008 http://rga.revues.org/index524.html , posted March 4, 2009 .

(3) These licenses provide a legal alternative for those not wishing to protect their works using the intellectual property rights standards in their countries. The aim is to encourage simple and legitimate way traffic works , exchange and creativity ( especially in the sense that , with some licenses , a work may be supplemented or modified by a third party) .

(4) John Sulston , Le Monde Diplomatique , December 2002 , p. 28, 29 .

Bibliography
– Aigrain , Philippe , Common Cause : Information between common good and property , Fayard, 2005.
– Collective ” Common goods and property,” Sustainable Development and territories , File No. 10 , 2008, available at http://developpementdurable.revues.org/5143
– Hardin, Garrett , “The Tragedy of the Commons ” , Science , vol. 162, No. 3859 , 1968 , p. From 1243 to 1248 .
– Ostrom , Elinor , The Governance of the commons , Editions de Boeck , 2010.
– Petrella , Riccardo , Water , common public good , Alternatives to ” petrolisation ” water , Editions de l’Aube , 2004.
– Young, Oran R., “Managing the global commons “, International Review , No. 9 , October 2000 , p. 147-161 . 

 

Sandra Berthelot #611

Sector Mobile phones in Africa : “I use my phone for everything,” exclaimed the 24-year-old Kenyan-Ugandan

The mobile networks have developed rapidly in recent years in areas previously unserved in Africa. Alongside the European Orange, Vodafone and Tigo (Millicom), it is South Africa’s MTN and Zain Middle Eastern and Moov.

Their strategy is to lower prices to increase market share, even as investments in network development is slow due to the financial crisis. A key part of the communications revolution “in Africa” factor is the reduction in roaming charges – which is to apply the local rate to a user even if it is abroad. Regional integration will increase as these strategies will spread operators and ultimately cancel the price differences from one country to another.

The rise in investment in mobile telephony due to a large potential for growth in African markets. This finds its roots in an unprecedented demand by African consumers. The effect of the new entry of technology can give them access and increase the interest in the development, such as education, health, payments or trade.

The increase in pan-African mobile networks can be explained by the strong presence of European operators Orange, Tigo and Vodacom, South Africa’s MTN and Zain Middle Eastern and Moov. The six operators accounted for 52% of mobile subscriptions in Africa in 2008(Figure1). The figures on the population covered by these operators are impressive: Zain and MTN had, respectively, 62 and 55 million African consumers in 2008. Vodafone is close behind with 44 million users. Other operators, Orange, Moov and Tigo together cover 25 million consumers. On the whole, 370 million Africans had a line of mobile phones in 2008, that is to say 4 out of 10 African.

The average rate of growth of the pan-African operators is impressive. It stood at 41% in 2008, 44% in 2009 (Fugure 2). But two newcomers (Orange, Tigo and 68% to 82%) were much better than some operators already present (Zain, MTN and 52%, 60%). Most of the growth is provided by Zain Nigeria, which represents 43% of its subscribers in Africa.

The penetration rate of mobile phones is still low, the region has a strong growth potencial. Operators in emerging countries, as well as those of European countries, this potential well integrated into their investment policies.

Africa demonstrates its potential for technological innovation and commercial. It also shows that telecom operators and regulators can work together to design effective solutions in terms of cost reduction. In the European Union, of such agreements have foundered on regulatory considerations when, for example, Vodafone and Mannesmann sought to merge in 2000. The merger was self-mockery as long as the two parties offer roaming to mobile operators as other affiliates. The fact that African operators are present in a large number of countries and that PaymentsPlus re-interventions are limited allowed the development of the Pan-African network tariff.

The rise in investment in mobile telephony due to a large potential for growth in African markets. This finds its roots in an unprecedented demand by African consumers, who finally find the arrival of technology that can give them access to strong interest in the development, such as education, health, payments or trade, and also for bank. Today we see a new operation with mobile phone : transfer money with mobile phone. This new technology also new increases the demand of consumer and provide competitiveness between mobile firms To capture this new opportunity. Companies are responsible of the creation of new needs.

We can conclude that we see the use of mobile phones for social reasons, however, could be of significant economic importance, in particular in terms of reducing vulnerability. Indeed, a significant proportion of these calls is intended to contact family and friends in case of emergency and to facilitate money transfers. Besides, mobile technologies are used to distribute educational material, but also reading tutoring remotely. An example of this multi-purpose: the South African Mxit mobile platform. In addition, this network is a service of public interest. However, in terms of poverty reduction, the results are more mixed, the most vulnerable individuals in economic terms are particularly excluded from this technology. These people probably require that solutions fully adapted to their specific being made available .

Sources :

http://www.mckinsey.com/insights/economic_studies/africas_path_to_growth_sector_by_sector

 http://www.boston.com/business/articles/2011/11/09/industry_says_africa_fastest_growing_mobile_market/

 http://www.ft.com/intl/cms/s/0/0846ab76-8c8d-11e2-8ee0-00144feabdc0.html#axzz2fAukEavh

 Sandra Berthelot #611


“In a context of crisis or whether you buy the best or you buy nothing at all”

According to Cartier, selling jewelry and watches in the middle of a crisis, not only economic but also social, is what its Chief Executive said “a positive sign for the future”. “In a context of crisis, or whether you buy the best or you buy nothing at all”, Stanislas de Quercize said after the opening ceremony of the latest and solo Cartier Store in Lisbon September 2013.

In 2009 Cartier closed its only store in Lisbon. The store had only lived for 10 years but with the financial crisis knocking at the door, the back then Chief Executive opted to close doors. Cartier claimed they had a new strategic realignment.

Four years after and with a new face as Chief Executive, Stanislas opts to invest in a country where unemployment is set (2012) to 15,7% (INE), -3,3% Real GDP Growth (INE), -0,9% Real Household Disposable Income (INE) and so on. With such constraints are we, Lisbon, his target? Are we willing to pay 500€ for basic cufflinks, the cheapest product inside the store? Will we opt not to buy in an apparel store and instead buy a ring?

Cartier Lisbon is situated in one of the most important streets, Avenida da Liberdade. It could be a strategic decision considering the high flow of tourists with high purchasing power in the area and to who the prices do not seem to ruffle. In the first six months of 2013, 41% of the tourists who asked for tax refund in eligible products for tax free were Angolan. It could be an indicator that maybe we, Lisbon, are not exactly the type of consumers that Cartier is trying to gain, but Lisbon as city of high cultural value and visitors with high purchasing power looking for luxury products. For Cartier, Lisbon is being a “platform” for Angolan buyers for example, without the risks of the Angolan market.

On the other hand a rich consumer, Portuguese or foreign, can opt to buy these luxury products and see them as savings. In the long run a gold ring can be more valuable than today. I may opt to consume today and sell in the future in case I need.

This luxury goods market it’s been growing in and outside Portugal. People want to buy luxury goods as if a social status, as savings, or just because they want and can. During crisis the rich are not spending as willingly as they were before but they are approaching the height of that cash flow. We can look at the numbers in order to recognize the trend. The Suisse Group Richemont, which detains Cartier and many more, has reached an increase of 30% in profits (end 2012), and Cartier along with Net-à-Porter was responsible for 35% of that increasing.   Also worldwide brands are targeting Portugal as an intermediary to enter new markets, new clients.

Cities such Lisbon may be their hope to gain market in such wanted emerging countries. We sure can take advantage of worldwide brands investing in our country during crisis, it can boost confidence and attract visitors and investors. Let the success of this opening be a good indicator that Lisbon/Portugal is also a market for powerful brands and therefore wallets.    

Francisca 680