Case: Hild, M., Dwidevy, A., and Raj, A., 2004, “The Biggest Auction Ever: 3G Licensing in Western Europe”, Darden Business Publishing
Discussion question: What are the alternatives to auctions?
Textbook Reading: Chapter 3 (Intro and Section 3.3; pp. 65-67 and pp.83-89) and Chapter 12 (Section 12.4; pp. 434-437
In this lecture video Tim Roughgarden “provides a detailed case study of the 2016-2017 Federal Communications Commission incentive auction for repurposing wireless spectrum”. It demonstrates how economics, computer science and business can coincide to solve complete real world problems.
A well-designed auction forces bidders to reveal the truth about their own estimate of the prize’s value. At the same time, the auction shares that information with the other bidders. And it sets the price accordingly. It is quite a trick.
Instructor resource: The Biggest Auction Ever: What Happened Next?, February 2019
To see my guided tour of the Dutch flower auction in Aalsmeer, see here:
Learning Objectives: To consider how auctions compare to other allocation mechanisms. To understand different types of auction and apply them to real examples.
Cutting edge theory: Auctions are used in e-commerce
Focus on diversity: An expert on applied auction formats, Susan Athey was the first female winner of the John Bates Clark medal. She has been an advisor to Microsoft and you can follow her on Twitter here.
Spotlight on sustainability: How governments can use beauty contests to mitigate the environmental impact of infrastructure spending
“If the opportunity existed so that I could help out someone in need while helping myself, I might do it,” Bellocchio said.
Bellocchio argues that kidney transplants are low-risk procedures, and notes that you can donate an organ — even though you can’t sell one.
“Altruistic donors are lauded for their selflessness. Their vital role in saving lives is undeniable,” the court papers say.
“However, demand outstrips supply, and there is no valid constitutional or public policy rationale why one should not be able to receive a profit from such a transaction.”
The issue of repugnance rests on the claim that the moral status of an activity shouldn’t hinge on whether money changes hands. If something is morally permissible to exchange for free, then people should be allowed to trade. Another way of thinking about this is that the reason slavery was wrong was because of the slavery, not the profits. If someone “donated” a slave, that wouldn’t be ok.
Common rejoinders to markets include things like:
Financial compensation commodities the good/service and thus changes our relationship with it. As Peter Jaworski explains in the podcast linked below, we buy and sell dogs and that doesn’t mean we treat them as mere objects.
Consider the case of sulphur dioxide emissions (via McMillan, J., (2002) Reinventing the Bazaar, W.W. Norton & Co. (p.182-187) link), and notice how for many environmental activists the moral objections to trading rights to pollute seemingly outweighed the dramatic progress on reducing harmful pollution. This implies that switching people’s mindset to tolerate market mechanisms could be an incredibly powerful tool to improve the world around us.
The Story of Vaccine CA is a really good example of an urgent allocation problem that cannot be solved by markets or by central planning. It’s an ethnographic and anecdotal account of a 200 day period where tech volunteers got together to alert American’s on where covid shots were available.
Listen:
Ep. 2, Peter Jaworski – Should Markets Have Limits? The Curious Task, August 14th 2019 – in this interview Peter Jaworski argues that If it’s morally permissible to donate blood plasma it should be ok to be paid for it. In fact, if we pay companies for plasma bought from Americans, why not pay Canadians? And if every other person involved (doctors, nurses, equipment suppliers, logistics) is being paid, why shouldn’t the person making the donation?
Learning Objectives: Understand the scope and ethical boundaries of markets
Focus on diversity: Virginia Postrel’s decision to donate a kidney, and write about it, provides a personal and inspirational view of the topic.
Textbook Reading: Chapter 5 (Section 5.3; pp. 145-149)
The world’s largest retailer, Alibaba, has no stock
The world’s largest taxi company, Uber, owns no cars
AirBnB own no hotels
Facebook produce little media content
Platforms are dominating an increasing area of the digital landscape and generate revenue through:
Subscription fees
Commissions
The monetization of attention
This case study looks at the effect of Ariana Grande’s sell out concert at Madison Square Garden in 2015. The chart below is fascinating. The red line is a reflection of demand, showing how many people are opening the app (presumably because they are hoping to get a ride). The peak at the end of the concert is obvious and increases by a factor of 4. Ordinarily, one might expect massive increases in wait times and a shortage of drivers. However Uber’s surge pricing algorithm increased the fare which enticed more drivers to be available. This is the green line.
The consequence of the increase in supply, to deal with the heightened demand, was an extra minute of wait time but no drop off in the number of completed rides. How amazing!
In 2023 I published an academic article on how cultural economics helps us to categorise and understand new entrants such as Uber. I find that reducing entry barriers and less exclusion are key factors in a dynamic market order. Here is Elizabeth Warren emphasising the distinction between employees and contractors (note: I think she’s wrong):
Big corporations are "misclassifying" workers as contractors to cheat them of their benefits (I'm looking at you, @Uber).
“You want supply to always be full, and you use price to basically either bring more supply on or get more supply off, or get more demand in the system or get some demand out,” he lectures like a professor. “It’s classic Econ 101.”
Don’t forget – waiting in line is just another form of surge pricing:
Another upside of ride sharing apps is a reduction in drink driving. According to one study,
Our results imply that ridesharing has decreased U.S. traffic fatalities by 5.2% in areas where it operates. The annual life-saving benefits are $6.8 billion.
An excellent article on the incentives of platform industries is “The Host’s Dilemma” by Jonathan Barnett. He argues that platform providers face a trade off between being open (and generating users) and regulating access (to monetise).
The point of this session is to critically examine the economic theory of competition, by contrasting “competition as a market structure”, with “competition as a behavioural activity”. This turns the debate away from market concentration, towards the issue of contestability and sustained competitive advantage. We also see that competition is the driving force of the market process, and how this relates to regulation. Indeed a cynical view is that anti-trust is simply the strategic use of government powers by incumbent firms to restrict competition.
The lecture mentioned the tricky case of patents, which are one of three areas of intellectual property:
Prior to becoming Chair of the Federal Trade Commission, Lina Khan, wrote a 2017 article ‘Amazon’s Anti-Trust Paradox‘ that pointed out that the traditional concern of competition authorities – that monopolists would use their market power to raise prices – is inappropriate when considering modern technology platforms. However, her stringent views on regulatory issues seem to neglect the concept of creative destruction. There’s a long list of examples of companies that appeared to be in a dominant position, undermined by the perennial force of competition.
Mar 1998: “How Yahoo! Won the Search Wars” (Fortune)
Sep 1998: Google founded
Feb 2004: Facebook founded
Feb 2007: “Will MySpace ever lose its monopoly?” (Guardian)
Jun 2007: iPhone released
Nov 2007: “Nokia. One Billion Customers—Can Anyone Catch the Cell Phone King? (Forbes) pic.twitter.com/uGKcovNSvO
In 2023 Lina Khan was interviewed by Planet Money, and I found it interesting how she pursued her biggest cases primarily on the grounds of potential outcomes, and then defended them by claiming that they signalled that the authorities were going to be increasingly litigious and active. This antagonistic attitude struck me as being quite far from the original role of competition authorities, which is to ensure an even playing field and to prioritise consumers.
Compare that to the defense industry, with this great graphic showing consolidation over from 1980-2001:
Bertrand competition shows how the act of competition can take place even with just two companies. In fact, the concept of competition doesn’t rely on the number of competitors at all. For example this advert reveals how Usain Bolt’s lack of “competition” doesn’t prevent him improving himself.
This is a good explanation of the side by side market/firm diagram, and the process by which perfectly competitive firms make zero profit in equilibrium.
Some good examples of daft occupational licensing are in this Twitter thread.
This is a nice example of the difference between complements and substitutes, and whether external economies of scale mean that more competition benefits the competitors:
once i asked an escape room owner whether they got annoyed when other escape rooms opened in their area and competed for their business
and they said “nah – if someone makes a good escape room, then the people who play it are gonna want to play more”
i think about that a lot
— goodbye little tweet; you belong to the people now (@pettyantics) July 27, 2020
Are targeted ads better for the consumer than uniform ones?
Is Facebook merely a platform? Or a media company?
Re network effects: Is it a natural monopoly?
How do you regulate zero price products? [Don’t monopoly on pricing power! Do it on barriers to entry.]
Barriers or costs?
Why do they want to be regulated? Why do you think the congressional hearings took place?
Who owns your metadata? Are they really your likes?
Learning Objectives: Contrast competition in a static sense, defined in terms of market concentration, with competition in a dynamic sense, defined in terms of contestability. Understand the difference between barriers and costs.
The activity is based on Holt, Charles A., 1996, “Trading in the Pit Market” Journal of Economic Perspectives 10(1):193-203
Textbook Reading: Chapter 3 (Intro, Section 3.1, 3.2; pp. 65-83)
This video shows how prices are formed at the London Metal Exchange:
And this video shows a behind the scenes look at “the ring”:
In March 2022 the price of Nickel jumped dramatically in early trading and the CEO of the LME decided to suspend trading and cancel previous orders. The hedge fund Elliott Associate had made almost half a billion pounds from the market turbulence and decided to sue. Read more about it here.
Textbook Reading: Chapter 1 (Section 1.3; pp. 30-38) and Chapter 4 (Section 4.3; pp. 112-122)
The main concepts from this session – elasticity and price discrimination – lend themselves beautifully to practical implications. A nice application is an identification of the price, income, and cross price elasticities of various products. That said, I think it’s easy to misuse these concepts. Cross price elasticity is in part captured already in price elasticity (since a chief determinant of price elasticity is the availability of substitutes) and there can be an unfortunate tendency to use income elasticity labels inappropriately. I do not believe in any inherent distinction between “necessities” and “luxuries” – as Mary Douglas said, “there will always be luxuries, for rank must be marked” 1979 [1996] p.85). Income elasticities are better assigned to social groups, rather than the goods themselves.
I use Mr Busy and Mr Savvy as examples rather than the female versions because I find the “Little Miss” designation to imply subservience. Also, there isn’t a direct equivalent for both. Although there is a Little Miss Busy (even though the picture is not as evocative of busyness as Mr Busy) there is no Little Miss Savvy. There is a Mrs Thrifty, which works well, but she only appears as a minor character (as the wife of Mr Thrifty).and doesn’t look very thrifty. There is an alternative, and obviously fake “Little Miss Thrifty” (pictured) but she doesn’t look thrifty either. Liking shopping is probably the opposite of thriftyness! That’s why I stick with the men.
The following is a great resource on price discrimination
Finding ways to reduce costs is super important. As Jeff Bezos said, “cost reduction means inventing a better way, and when you invent a better way you make the whole world richer.”
If you are interested in aviation, this episode of Cockpit Casual starts with a fascinating account of how airline companies (and airports) reacted to covid given the large number of leased planes and the substitutability of passenger and cargo payloads.
The pioneer of no frills airlines were Southwest. See “Why are no-frills airlines so cheap?” The Economist, October 18th 2013. This article explains some of their key decisions. Which include:
Only flying 737s
Simple fare structure
Point-to-point (for less congested airports)
No assigned seating
No inflight meals
Only one fair class
(Note that this demonstrates a lack of price discrimination. Whereas Ryanair do lots of it.)
Learning Objectives: Understanding internal and external sources of economies of scale.
Spotlight on sustainability: Use of waste products
Textbook Reading: Chapter 2 (Intro, Section 2.1 and 2.2, pp. 39-54)
La Marmotte was published by Sage in 2019. La Marmotte is a fictitious restaurant but based on a real business in Montalbert. You can see whether the skiing is good right now with this webcam.
Here is a video explaining the concept of the planning horizon:
A key part of this session is grasping the power of this tweet by Sam Altman:
My favourite example of the importance of having an intuitive understanding of the shape of average costs curves is this one:
2001:
