Two-sided markets

Case:

  • Moon, Y., “Uber: Changing The Way The World Moves” Harvard Business School Case No. 316-101, January 2017

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 very little media content

In this Vanity Fair article, Uber co-founder Travis Kalanick defends surge pricing:

“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.”

An excellent article on the incentives of platform industrys 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).

Recommended reading: Barnett, J.M., The Hosts Dilemma, Harvard Law Review

Learning Objectives: Peer-to-peer markets, Ethical implications of disruptive business models

Cutting edge theory: An economic analysis of platforms

Spotlight on sustainability: Employee welfare

CC Simulation

Case:

  • CC Simulation, February 2014
  • Discussion question: Is the market for airport services in the UK competitive?

Textbook Reading: Chapter 5 (Section 5.4; pp. 149-159)

Group activity: CC Simulation B, May 2018

You can watch a good introduction to Porter’s 5 forces here. An explanation from Michael Porter himself is here:

And no lecture on the 5 Forces model would be complete without watching Florian Ederer’s take:

Case solution: CC Simulation: The Verdict, October 2014
Group activity: Tollbooth, December 2020
Learning Objectives: Understand how regulators view competition. Create a market entry strategy.

Spotlight on sustainability: Look at the European market for aviation travel and emissions

Competition and the Market Process

Lecture handout: Competition and the market process*

Textbook Reading: Chapter 5 (Intro, Section 5.1, 5.2 and 5.5; pp. 135-145 and pp. 160-164)

Half of all U.S. publicly traded companies have disappeared within ten years of entering the market (West, 2017, p.12)

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.

The lecture mentioned the tricky case of patents, which are one of three areas of intellectual property:

  • Patents protect inventions
  • Copyrights cover creative works
  • Trademarks cover brand names

A timely example of anti-trust is the tech industry. See this article by Russell Brandom explaining the case against Amazon, Apple, Facebook and Google. By contrast, Megan McArdle says ‘Yes, Google has a monopoly: who cares?‘ I recommend Ben Evans’ discussion of tech giants and definitions of market share, and this tl:dr primer on why mergers and acquisitions are so important for the tech industry by the International Centre for Law and Economics.

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.

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:

Consider the following points:

    • What is the value?
    • 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.

Market equilibrium

Lecture handout: Market equilibrium*

Textbook Reading: Chapter 3 (Intro, Section 3.1, 3.2; pp. 65-83)

Markets are where buyers and sellers meet: where demand and supply interact, and resources get exchanged.

This video shows how demand and supply both originate from the concept of value.

My preferred way of teaching this content is the trading simulation called “Trading in a Pit Market”.

Group activity:

This video shows how prices are formed at the London Metal Exchange:

And this video shows a behind the scenes look at “the ring”:

A good class activity to teach these concepts is the following worksheet:

Group activity:  Comparative Statics Worksheet

 

Instructor resource: Comparative Statics Worksheet Solutions

There is also this longer assignment:

Group activity:  Equilibrium Assignment, July 2018 and complete this Equilibrium Assignment Form
Instructor resource: Equilibrium Assignment Solutions, July 2018

This topic is all about how market exchange generates prices, which can be used for information purposes. Some of my favourite examples of using price data to tell a story are the two charts below:

 

Here’s a look at applying some comparative statics to the UK housing market:

Here’s a more traditional treatment of demand and supply analysis:

Interactive practice: Shifts in supply or demand

Interactive practice: Shifts in both supply and demand curves

Here’s an excellent video on the role of prices:

This article provides a collection of empirical evidence of the effect of minimum wages.

Here’s a video on rent control:

In 2020 Berlin adopted rent control and, as economists predicted, it didn’t work. As Andreas Kluth points out in that article:

In a shortage, regulating the price [of a good] only trades one expression of scarcity (high prices) for another (empty shelves).

Perhaps the key lesson of economics is that you cannot escape scarcity. A good resource on price gouging is Mike Munger’s interview with Russ Roberts, on EconTalk (Jan 8th, 2007).


This page ties into Chapter 3 of Economics: A Complete Guide for Business

Learning Objectives: Apply basic comparative statics to a range of economic events. Understand how interventions affect market activity

Focus on diversity: Legendary microeconomics instructor Walter Williams (1936-2020) wrote extensively on how government restrictions on mutually beneficial exchange can harm minority groups. He studied the impact of minimum wage legislation in apartheid South Africa and published a book called ‘The State Against Blacks‘ . Here is a video about his autobiography, ‘Up From the Projects‘. Here is video footage of a toast from 2003, which occurred when I was his student. Here is a fitting GMU economics department tribute to his career. And here is the gift he left people like me, to stop me doing things like this

Price discrimination

Activity: Read the following Twitter thread

Instructions: Verify as much of the information in the case as possible


Activity: Complete the India Worksheet, April 2019 or complete This India Quiz
Lecture handout: India DB*

Textbook Reading: Chapter 4 (Section 4.3; pp. 112-122) and Chapter 12 (Section 12.4; pp. 434-437)

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.

For a 30 point quiz see ‘Elasticity Assignment

The following is a great resource on price discrimination

How price discrimination relates to airlines, see:

Also see this video on the concept of bundling:

Group activity: Wembley Stadium, July 2012
Learning Objectives: Understand different techniques for price differentiation. See the relationship between revenue and elasticity

Cutting edge theory: The case includes a discussion of PWYW pricing models

Focus on diversity: The case is set in India

Economies of scale

Case: “Dogfight over Europe: Ryanair (A)” Harvard Business School case no. 9-700-115, November 21st 2007

Discussion question: What are some sources of economies of scale? How do they apply to British Airways in 1986?


Textbook Reading: Chapter 2 (Section 2.3; pp. 54-59)

During class I also recommend:

Case: “Dogfight over Europe: Ryanair (B)” Harvard Business School case no. 700116, June 12th 2000

A key source of economies of scale is ‘learning by doing’, and this video shows some fun examples:

This video shows how economies of scale played an important role in BIC

The Great Uncoupling‘, (episode 170 of Sam Harris’ Making Sense podcast, with guest Andrew McAfee), is a timely reminder that economics is about how to make best use of scarce resource, and that efficiency and productivity are good for society and the environment. It also provides an optimistic message about how computing reduces resource use.

A 2014 newspaper report likened the rise of budget supermarkets (such as Aldi and Lidl) to the strategy that saw Ryanair outcompete BA:

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

Cost curves

Case:


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.

Lecture handout: Cost curves*

Textbook Reading: Chapter 2 (Intro, Section 2.1 and 2.2, pp. 39-54)

A wonderful extension of the mechanistic principles that drive returns to scale and economies of scale can be found in Scale, by Geoffrey West (see here for a review).

My favourite example of the importance of having an intuitive understanding of the shape of average costs curves is this one:

Here’s my video on the difference between short run and long run decision making:

 

And here’s a good tweet that captures the basic point:

Here’s a video with a more traditional, textbook treatment of supply curves:

Interactive practice: Change in supply vs. change in quantity supplied

Finally, in this video on the UK probation service I look at different ways of measuring cost:

Learning Objectives: Sunk cost fallacy, short term shut down condition, profit maximisation, deriving a supply curve.

Cutting edge theory: La Marmotte was published in 2019!

Understanding cost

Lecture handout: Understanding cost*

Textbook Reading: Chapter 2 (Intro and Section 2.4, pp. 39-34 and 59-63)

The aim of this session is to understand the economic concept of opportunity cost.

Group activity:

  • Malhotra, Deepak, 2005, “Hamilton Real Estate: BUYER”, Harvard Business School Case No. 9-905-052 (£)
  • Malhotra, Deepak, 2005, “Hamilton Real Estate: SELLER”, Harvard Business School Case No. 9-905-053 (£)

I believe that the case discussion demonstrates our inherent reluctance to lie. However:

Here is a more recent example of obtaining copyright for the use of a photograph:


In the debrief it’s important to realise when someone is being evasive. I good example of this is in the U.S. version of The Office, where Andy has to repeat the same question to Angela 3 times before he gets to the truth. (Season 5, Episode 12, from 9:22 – 10:13).

‘Better Call Saul’ has a nice example of the sunk cost fallacy:

Learning Objectives: Opportunity cost reasoning, basic principles of negotiation.

Focus on diversity: The Hamilton Real Estate case is used as the first session on the Harvard MBA course on negotiation. It was written by Deepak Malhotra who has a recent book called ‘Negotiating the Impossible‘. You can follow him on Twitter @Prof_Malhotra.

Max U

Case:


If you’re unsure about the basic rules of differentiation, see this handout:

If you’re unsure about using the Lagrangian method, here’s a video overview:

Another good example is here:

Learning Objectives: Analyse alternative indifference curves. Solve a Lagrangian maximisation

Focus on diversity: Joan’s utility function is named after the famous economist Joan Robinson

Incentives matter

Lecture handout: Incentives matter*

Textbook Reading: Chapter 1 (Intro and Section 1.1; pp. 5-16)

The aim of this session is to fully understand the power of incentives, which are what economists define as the relationship between the benefits (the value we expect to gain) and the costs (the value we expect to give up) of a decision.

In this lecture we saw how conventional wisdom believes that seatbelts save lives. But economic wisdom asks how they affect the benefits and costs of being in an accident. The lecture content on seatbelts comes from a great book called “Risk“, by UCL’s John Adams.

Regarding bicycle helmets, here is the New York Times article claiming that “Bicycle Helmets Put You At Risk”. In terms of academic studies, there is some interesting evidence. Schmidt et al (2019) find that wearing helmets reduces the cognitive control of riders, and reduces risk sensitivity. Hoye et al (2020) found that the cyclists under their observation in Denmark who wore helmets did not demonstrate signs of riskier behaviour than those who didn’t, but acknowledged that this may be because their risk compensation is inhibited by the fact that people who wear helmets are more likely to be safety conscious than those who don’t. Indeed given that helmet wearers are systematically more likely to be risk averse, evidence of no difference in actual risk taking may be considered evidence for risk compensation! Finally, the issue is serious and I have no intention of contradicting the claim that if you happen to be in an accident, it is good to have been wearing a helmet. Indeed Olivier and Creighton (2017) looked at 40 studies to conclude that for people who are involved in an accident, helmet use reduced the likelihood of serious and fatal head injuries. I am grateful to an ESCP GMP student for sending me these studies.

In this article, Tom Chivers provides a really good overview of how changing incentives can be more effective than trying to change people’s desires, and therefore technological fixes can be just as important social policy tools as attempting to fix the “root causes”.

Here is short quiz on the effect of taxation.

The economic reforms conducted in China that prompted their integration into the global economy is a perfect example of the power of incentives. For an overview of what happened, see:

The lecture also looked at how coordination might take place without centralised control. This clip of San Francisco in 1906 demonstrates a spontaneous order:

And here’s a video on the concept of “shared space”, and what happens when traffic lights are removed:

This is a great photo essay about “continuous sidewalks” and here’s a video about their usage in the Netherlands:

Learning Objectives: Understand and apply the “Economic Way of Thinking”.

Spotlight on sustainability: A discussion of cycling safety