Wednesday, 17 September 2014

Internalised externalities in shopping malls

As we will see in our Economics course, externalities are when actions of one party affect another. Smoking is an example or pollution or global warming.  That's not a problem, Coase taught us, if the parties can negotiate over the problem and so "internalise the externality": ask someone else to stop smoking or pay them not to pollute (global warming seems like a problem here).  But one would expect shopping malls to be able to do this, a question taken up by Gould, Pashigian, Prendergast. REcStat, 2005.

In their shopping mall data, anchor stores are 60% of the floor space. But they pay $4.13 rent per square foot, against $29.37 for the non-anchor stores.  Meanwhile average sales per sq foot are $185.34 adn $317.68.  All this is in table 1 of their paper, below.

Is this sensible?  Let's assume the Mall owners want to maximise total sales in the Mall (they will want to maximise their profits, but suppose they are related to total sales), and they have some spare space.  What would a price discriminating monopolist do?  Answer: equalise marginal revenue in each sub market (for constant marginal costs).  In this context, this means setting rents so that an extra square foot rented to an Anchor generates the same sales to that rented to a non-Anchor.

It looks like they are failing, see Table 1 since the non-Anchors generate much more sales.  So what is happening?  It's like that the presence of the anchors adds demand to the non-Anchors.  So another anchor square foot does not just generate $185 but an additional effect on the non-Anchors.  Their statistical analysis, using variation in sales and presence of different store types, suggests another Anchor square foot generates additional sales for non-Anchors of $116 per sq ft.  Thats a total of 185+116=$301, which is very close to $317.  The externality is internalised.

Price discrimination in the car industry

Here's a fantastic demonstration of price discrimination in the light vehicles industry from  Ana Aizcorbe, Benjamin Bridgman, and Jeremy Nalewai

Prices for light vehicles tend
to fall over their model year, and retrace those declines
when next year’s models are introduced.
Using a new dataset, we document that the
characteristics of car buyers vary significan
tly over the model year as well: as average
prices of vehicles fall over the model year,
so does the average income of the buyers.
Under the assumption that income is negativ
ely correlated with price sensitivity, our
results show that price-insensitive consumer
s buy early in the model year, with more
price-sensitive consumers waiting until prices fall.
This empirical result suggests car de
alers engage in price skimming (i.e.
intertemporal price discrimination), introduci
ng new models at a high price, selling to
those willing to pay top dollar, and then loweri
ng the price to sell to the remaining market

What do they do?

1.  they have detailed prices for light cars (for example a Honda Accord) in the U.S. from late 1999 to 2003. The price data gives average transaction prices, net of cash rebates and
financing incentives across all buyers in a month (consumers, firms and government).
2. this is then matched with data on on the characteristics of car buyers from surveys compiled by market data vendor NOPworld, including income surveys per buyer.
3. here's the key diagram.  Prices fall for each model over the year until a new model is introduced. What happens to the buyer type? High income people buy first, price discrimination by income.  Note they check that the early models are not the best appointed etc. so it really is the same car.

Various teaching links

1. Economists assume that firms will want to profit maximise or loss minimise.  What about otehr motivations like culture?  Here's why Economists are right at least when superstitious investors play in markets with non-superstitious ones.

2. Via John Cochrane, a long essay on whether financial markets are efficient. (answer: pretty efficient actually).

3. The power of compound interest from Tim Taylor:What's the Difference Between 2% and 3%?
4. Do agents respond to incentives?  When it comes to taxation they most certainly do. Here's Tim Taylor explaining the Double Irish Dutch Sandwich.
5. Self-explanatory:
Why Should You Major in Economics?
1. Economics is a General-Purpose Intellectual Technology. It's true that economics can't tell you whether God exists and isn't going to tell you what happens when you mix Chemical A and Chemical B, but an economics degree gives you a set of intellectual tools that can be adapted to any social problem. Economics is about a lot more than money, banking, and interest rates. Recent examples of extremely interesting applications of economics to subjects that might not, at first glance, look like what most people think of as economics include David Skarbek's work on prison gangs, Chris Coyne's work on war, and David Romer's work on whether football teams go for it on fourth down often enough. If you want to understand the social world, you should study economics.
2. Since Economics is a General-Purpose Intellectual Technology, you can do almost anything with an economics major.
3. Economics is a Complement to Information Technology. Data and computing power are getting cheaper by the second. Economics helps us sort through the data to figure out what is really going on.
4. Economics Pays Well and Is The Most Employable of the Non-Vocational Majors. In economics, you can study a lot of the same things you would study in the other social sciences and humanities, but the degree is more employable than a degree in the humanities or the other social sciences.
5. "Economics is Both Practical and Interesting." That's what Jeffrey Miron says in his 2008 discussion of the economics major. Economics is a major that strikes a very nice balance between a liberal arts education and a vocational education.

6. A great essay by Mark Lemley on how the internet has been so disruptive:

Mark A. Lemley, IP in a World Without Scarcity, Stanford Public Law Working Paper No. 2413974, March 24, 2014,

Things are valuable because they are scarce. The more abundant they become, they cheaper they become. But a series of technological changes is underway that promises to end scarcity as we know it for a wide variety of goods. The Internet is the most obvious example, because the change there is furthest along. The Internet has reduced the cost of production and distribution of informational content effectively to zero. In many cases it has also dramatically reduced the cost of producing that content. And it has changed the way in which information is distributed, separating the creators of content from the distributors.

7.  Whom gets the returns from innovation?  Lessons from The Wire on Chicken McNuggetts: video here, transcript here. Warning: very strong language.

 with detailed data by race here, "Detailed Fulton Fish Market Data (worksheet format) (dictionary)"
and the price differences by race here (
“Testing for Imperfect Competition at the Fulton Fish Market,” Rand Journal of Economics, 1995, 26, 75-92. table appendix b, page 90. Average price per fish paid, April 13th - May 8th, 1992.  73c, 64c and 80c for Asian, Black and White customers.

10. In case that anyone doubts that demand curves slope downwards and can be shifted by outside events, here's the effect of the Pope on the price of fish.  (When Catholics were forbidden to eat meat on Friday, it was a tradition for them to eat fish on Friday as a substitute for meat. They were allowed to eat fish on Friday. After the pope allowed them to eat meat on Friday, suddenly, for Fridays, they had a substitute for fish; they could choose meat instead. With a substitute becoming available, many chose the substitute instead of the traditional fish. This increased the demand for meat but decreased the demand for fish.)

Monday, 23 June 2014

Various teaching links

The long term discount rate is 2.5%.  Vital for climate change

Successful London schools: it's early intervention 

Friday, 20 June 2014

The Economic Significance of the UK Science Base: A New Report

We have a new report [pdf], summary page,  out on 30th April, 2014, "The Economic Significance of the UK Science Base".  It's done for the Campaign for Science and Engineering and is by Jonathan Haskel, Alan Hughes and Elif Bascavusoglu-Moreau.

We look at two main questions:

1. How does public-sector funding of the science base affect private involvement?

The caricature is that research-orientated universities and academics are removed from the "real world" and so have no connection to anything useful.  In fact, completely the opposite is the case.  Surveys of academics indicate there is a strong positive correlation between public-sector funding and private involvement in research both for universities and individual researchers.
  • Universities that receive higher levels of public research funding generate more research income from other sources (e.g. charities, industry, overseas).
  • Regardless of institution, individual scientists who hold Research Council grants are more likely than non-grant holders to be ‘outward-facing’ and interact with the wider community, for example through the commercial application of their research.

2. How does public science funding affect private sector productivity?

Looking at data for industries over time, we find that public science funding generates substantial returns to the private sector:

  • Public investment in research increases private sector total factor productivity growth 
  • This effect is greatest in industries that themselves conduct significant R&D or report co-operative interactions with universities.
  • The rate of return to public investment is around 20% (in our most conservative estimate) which is a large rate of return for government projects.  If government made a one-off increase in public spending on R&D of £450m (5% of its £9bn total R&D spend), market sector output would rise by £90m per year, every year. Discounting this flow of extra output at 5% per year gives a total boost of £1.8bn to business sector output over time.

Meeting to discuss the findings. Taken from CASE website
CaSE will be holding a panel discussion on the economic significance of the UK science base in May. The panel and audience will discuss findings from Jonathan Haskel and Alan Hughes’ new report, ‘The Economic Significance of the UK Science Base’. This report, commissioned by CaSE and funded by a consortium of CaSE members, provides crucial economic evidence to support claims that Government can boost growth by investing in science and engineering research. The event is kindly hosted by The Department for Business, Innovation and Skills on 7th May, 2pm-3.30pm. The event is open to CaSE’s organisational members and collaborators. Please RSVP to

Saturday, 14 June 2014

Piketty summary

1. Solow's review of Piketty, a brilliant summary.

But the case against:

Making predictions about future technology

Is very hard. Here's the Competition Commission, reviewing a meger in 2001 between Kodak and ColourCare, two photo developing and printing companies.

Para 2.6

So it's not wholly wrong to b
e fair...but this graph of Kodak's fortunes says just how fast the market collapsed.