Thursday, November 7, 2013

Game theory is to blame for unjust system!

Good morning economists! Long time no see. I was rather busy (as usual), you know the normal married, gone to my honeymoon, taught three economics classes and so on :). Now that things are starting to settle down, I hope to tend to my blog again. A lot of interesting stories to tell as always.

A few days ago, I was drinking coffee on the beachfront in my hometown when I noticed something strange. A police car parked on the side of the road and the officers were stopping all people riding motorcycles. From what I could make out, they were asking for license, registration and checking to see whether riders were wearing their gear. They were even stopping old men riding small scooters.

At one point I noticed a teenager riding a GSXR. For those who are not familiar with motorcycles, this is a rather fast one, capable of reaching speeds well in excess of 200 km/h. The teen was not wearing a helmet and was showing off by doing burnouts (spinning the back wheel hard so that smoke was coming out as a result of the friction). I thought to myself that the police will most likely arrest this guy.
To my surprise, the police did absolutely nothing. They did not even flag him down. Upon further reflection, I understood that game theory is to blame (game theory is a situation where two or more players act based on their beliefs on how others will act).

The teen knows that his bike is fast enough to lose the police car in the small city streets. So if the police gave chase he would most likely run. So if his decision set was comprised of the decisions to run or not to run, he would always choose to run because the punishment from getting caught would be very severe.

The police on the other hand know that the teen would most likely run. The decision set of the police officers is comprised of the actions to give chase or not to give chase. If they decide to give chase and they catch the teen, they will most likely get a pat on the back from their superior officer. If however they give chase and cause an accident (or the teen gets injured from trying to get away) the officers will most likely end up in court and will lose their jobs in the process (yes it has happened before). So weighing their options, police officers decided not to give chase and they went back to giving tickets to 60 year olds riding scooters....oh the injustice.

Can you think of any other situations that game theory messes things up?

Monday, June 3, 2013

What keeps you from launching an innovative product?

Good morning all! I was watching on the news the other day the horrific accident of Air France's concorde (yes concorde is spelled with an -e-) aircraft which resulted in the decision by Air France and British Airways to retire their fleets.

The Concorde was, arguably, the most successful and sturdy aircraft that ever existed. During its 27 year service (!) only one accident involving a Concorde was recorded in 2000. The weird thing was that despite the fact that the accident was caused by a titanium strip that fell on the runway by an aircraft which took off only seconds before the unlucky Concorde, all airlines were quick to retire the aircraft citing safety issues. The real reason, however, was a well hidden secret.

The Concorde cost the airlines more to operate and run compared to a more conventional aircraft. It was supersonic, thus it needed a significant amount of fuel for each trip. Flying with the Concorde was only the privilege of the rich. As such, not a lot of Concordes were built during these 27 years. Some may argue that it was retired because of the operational costs.

However, when Sir Richard Branson, owner of Virgin Airways offered to buy the British Airways fleet for 5 million British Pounds, he was inexplicably denied.The fleet was retired and most of the airplanes are now part of avionic museums around the globe.

What was the reason for the retirement of such a successful aircraft? It certainly was not operational losses as BA could have sold the retired aircrafts to Virgin Atlantic. It seems that in the midst of the Boeing-Airbus war, the Concorde was a victim of economics. Carrying passengers subsonically, was found to be more profitable and profit was the punchline in the aircraft competitive market.

Even though the Concorde was ahead of its time and even though it was truly a revolution in travel even by today's standards, it was sacrificed for a higher profit. Afterall, Airbus (who was maintaining the Concorde) decided to stop maintenance and allow the aircraft to be retired.

The moral of the story? It does not matter how original or impressive a new product is. If the profit is not there, the product will be doomed to fail.

Have a great day!

Tuesday, May 28, 2013

A new market for positive pregnancy tests?

Good morning everyone! The secret to every success story in the business world involves the discovery of a new product, one which revolutionizes (most of the times) and redefines the industry. A great example of such a success story is Apple products during Steve Job's second run.

Now you do not have to be Steve Jobs to enjoy success, however, some bizarre products are being launched in the market lately maybe due to the economic desperation that overwhelms people during the economic recession.

One such product made an appearance on craigslist in Buffalo, New York.

 A woman is apparently selling her positive pregnancy tests. She maintains that ever since she became pregnant she has been asked many times for a positive pregnancy test. It is only natural to assume that deception is the aim of the potential buyer. I am really wondering how many positive pregnancy tests the woman will end up selling and how on earth she reached the decision to charge $25 for a test.

A couple of days ago I posted about a market (beard advertising) which excluded women. This time I guess the market described in this post excludes men...well, until they are shown the positive pregnancy test that is.

Have a great day!

Monday, May 27, 2013

Growing a beard can solve your financial problems!

Good morning economists! I think I speak for everyone when I argue that I am pretty much fed up with all the advertising media and the largely unimaginable attempts to sell products or services. The same old billboards, the same old ads on TV and radio.

A couple of marketing companies have attempted to revolutionize the way that products are advertised by paying individuals to tattoo an ad or a web link on different parts of their body.

The problem with this approach of course is that not a lot of people will be prepared to sacrifice their skin (literally) for the sake of advertising a product no matter the monetary compensation. In other words the opportunity cost of tattooing a marketing ad is quite high and thus the compensation must also be high.

A company in the US, however, came up with another way to market products. The company is prepared to pay $5 per day to anyone who is willing to wear a mini advertising billboard on his beard. 

The idea is quite interesting as all it takes for someone to make money is to grow a beard. And since a beard is not permanent, the opportunity cost and hence the monetary compensation is only $5 per day or $150 per month. A sense a new type of company in the works..."Rent a beard"! Kind of sexist though as the market excludes females.

Have a great day!

Friday, April 19, 2013

Where has the sentiment gone?

Good morning economists. Yesterday I was talking to a student of mine during a break. He told me a story about a neighbor who lost his job after working for a company for 17 years. "They showed him no respect" he added.

Respect? Sentiment? Those are things of the past. As we are feeling the impact of the recession, business owners tend to make business decisions with their calculator instead with their heads.
We all heard that "money cannot buy happiness". But it seems that lack of money can take away all traces of sentiment or emotion.

Could it be that the old saying is quite simply....wrong?

Have an emotional day!

Thursday, April 4, 2013

Qualifications needed to work at McDonald's

Good morning economists. Today I would like to discuss the job market and how this is changing as a result of the current recession. With youth unemployment rising to almost 12%, entry level positions like a cashier at McDonald's are becoming more demanding with regards to who they consider qualified applicants. A franchise in the US recently posted this on its website:
They are asking for their new cashier to have a bachelors degree! Traditionally only upper level management positions at McDonald's required any type of college degree but as it seems this trend is now changing. This is because firms realize that within the pool of the unemployed, there are degree holders who are willing to work for a lower pay (even close to the minimum wage).

The problem however, lies with the untrained youth labor who do not possess any such qualifications. The labor market requires that either they get some kind of qualification (degree or diploma) or that they work for below minimum wage compensation.

In the end, can someone afford not to get a college degree?

Have a nice weekend!

Easter bunny arrested for riding a motorcycle!

Good morning economists. We have all heard the term "price discrimination" being used in the world of business. Price discrimination is when a firm or organisation charges different groups of people different prices for the same product. Indeed in most cases, price discrimination is deemed to be unfair and illegal. I have decided to coin a similar phrase from the behavior of police authorities. Fine discrimination arises from the discretion of the officer to give a ticket or a warning depending on the circumstance. Allow me to share a personal story.

Last week I was riding my vintage motorcycle which is incapable of speeding or being used in any other way apart from the occasional easy ride around the town. I was pulled over by an officer who requested license and registration. After providing the necessary documents, he proceeded to point out that if he really wanted to, he could have given me a fine based on the size of my license plate and the fact that I was not wearing a full face helmet. "The fact of the matter is that I can come up with any reason to give you a fine if I want to", he argued.

A couple of days later, I came across a news story of a guy who was dressed up as an Easter bunny, riding his motorcycle on the highway.
While the whole idea may seem ridiculously funny, the officer stopped the bunny because the suit was impairing his ability to drive and was a distraction for other drivers. The officer proceeded to issue a warning against the two legged creature who WAS wearing a helmet at the time.

Perhaps I should make a copy of the photograph and carry it with me when I am riding my motorcycle. If I get pulled over I can always come up with the excuse of "hey I am not as bad as this guy, and this guy got away with it in the end"! In the end, is the officers' discretion of giving fines to the benefit of society or is it just another example of discrimination?

Perhaps I should consider switching my riding clothes to a chicken uniform if that will keep the police away!

Have a great day! 

Monday, April 1, 2013

Beware of wagging the dog!

Good morning economists! After taking a long break from blog writing (mainly due to increased workload and due to current events in Cyprus) I would like to examine today the idea of wagging the dog.  In fact today's post is inspired by the current economic crisis in Cyprus.

In 1997, a great movie hit the cinemas starring Dustin Hoffman and Robert De Niro. The movie was called "wag the dog" coined from a well known phrase in politics. The movie was about a presidential candidate who was involved in a sex scandal. In order to throw off the public's attention to the scandal, a movie producer was hired by the candidate's staff in order to stage a fake war. The idea was that everyone (voters) would be too preoccupied with "war" events to pay any attention to the sex scandal.

In a sense we as individuals are "wagging the dog" on a daily basis and on a much smaller scale. Haw often do you find yourself caught in a conversation which makes you feel uncomfortable? Think about your first reaction. Most likely, you will attempt to gracefully change the subject of the conversation. "Isn't the weather nice today", is one of the more usual catch phrases when you "wag the dog".

The problem with this short term solution is that the problem continues to exist and will eventually surface in the future. In the movie, staging a fake war may have thrown off the public's attention but it was not a real answer to the sex scandal. Wagging the dog will most likely work to minimize short term disutility (sense of uneasiness and anxiety) but as long as no real solution is found, the problem will continue to exist in the long term and most probably it will become more severe as well.

Have a great day!

Monday, February 25, 2013

So is it a buyers' or a sellers' market?

Good morning economists. It is no secret that the global recession has affected both firms and consumers to varying degrees. I would like to share a story which made me wonder whether the market is slowly but steadily becoming a buyers' market.

A buyers' market is a situation where supply exceeds demand thus giving the buyers or consumers bargaining advantage over the sellers. A sellers' market is the exact opposite. In that scenario, there is excess demand and suppliers can take advantage of consumers either by raising prices or by having some sort of advantage over negotiations.

A month ago, my vintage motorcycle was in need of service. I do have my regular mechanic that I always entrust to do a good job on the bike, however due to the recession his business has slowed down in the last six months. It came as a shock to me that it took my mechanic almost two weeks to service the bike. That is, change the oil and refill the fluid in the front springs. For anyone who is into motorcycles will understand that this is a three hour job!!!

The problem was that I could not cancel the deal since he started working on the bike on day one, by dismantling the front springs. So it was impossible for me to move to bike to another mechanic. I had to endure the delay despite my daily phone calls to expedite the work.

In a global market where there is arguably excess supply, I found myself falling victim of a sellers' market. In other words I was at a disadvantage over the negotiations for the completion of the work. I wondered at the time whether my mechanic really understood the concept of a buyers' market and the whole idea of excess supply. I guess the supplier still has some negotiating power in the case of services than in the simple sale of goods.

Have you fallen victims of a sellers' market recently?

Have a nice day!

Thursday, February 14, 2013

How not to destroy your valentine's day!

Good morning economists! It was Valentine's day yesterday and like all couples me and my significant other decided to celebrate by doing something special. I had made reservations to what is arguably one of the best restaurants in Cyprus as it received numerous awards throughout the years. We had visited the specific restaurant in the past and we were nothing but satisfied with their service and quality of dishes. I especially liked the fact that ordering a bottle of wine was always followed by a ritual where the bottle was opened and prepared next to the table with special attendance to detail (checking the wine color and right temperature).

Yesterday we were very excited as we could not wait to witness the same kind of service and food quality. Unfortunately it was a huge let down. The food was nothing special and it was not even anywhere near the usual culinary treat that we were used to at that specific restaurant. Further, the food was served cold as it was left standing for a significant amount of time. You see the restaurant was offering a pre-set menu.

When we ordered the bottle of wine, there was no opening the bottle ritual whatsoever. The waiter brought us an already opened bottle of wine that I was not even sure whether it was freshly opened. To add to this, the waiter emitted a rather unpleasant bodily odor and at one time his shirt was hanging outside his pants! Hardly the valentine's day I envisioned.

Lesson learnt. Never visit a restaurant with a pre-set menu. They cook in bulk and as a result plates are left standing, usual rituals are not followed and overall the quality of service declines. Next time, either pick a restaurant that has its usual menu or arrange to cook something special at home. Where has the personalized service gone?

Have a nice day!  

Monday, February 4, 2013

Baby diaper wars!

Good morning economists. Globalization is something that we have witnessed in one form or another during the last two decades. The development of the internet makes it easy to purchase goods from other countries and have them delivered right to your door. In fact, globalization has opened the door for many successful businesses that aim at buying goods at a low price and selling them for a profit.

The latest example of such behavior comes from Norway, where a large number of supermarkets in the south have entered into a "diaper price war". Supermarkets are lowering baby diaper prices in order to attract customers. And they are pretty successful in this endeavor.

Customers from Poland and Lithuania are literally driving their trucks to Norway, fill them up with baby diapers (each shipment costs around $9600) and sell them for twice the price in their respective countries. So a trip over to Norway can produce profits around $10000. And everything is completely legal! As a point of reference diapers in Norway cost $5,50 for a box of 50 diapers.

What do you say? Fancy a trip to Norway?

Have a nice day!

Tuesday, January 29, 2013

Al qaeda bicycle attack!

Good morning economists. The following is a true story which took place in 2002. Just about that time, I was starting my postgraduate degree and the ten students that started the program with me were pretty excited! Of course we were a rather diverse group, with students from the US, India, Iran, Holland and Cyprus. One of the first things that we did once we settled in our apartments was to purchase vehicles in order to move around. A couple of students from India, I remember, bought bicycles.

As soon as they bought them, they took them for an all important test drive. While they were riding their bikes, on the designated bicycle strip, they noticed that a big truck was approaching. In order to be safe, they climbed onto the pavement. Major mistake! A police officer on a bike was waiting for them and awarded them with a ticket as no riding on pavements was allowed. My two classmates pleaded ignorance and that there was no sign prohibiting this action. The police officer pointed to a sign that was HIDDEN behind a tree. There is no doubt that at one point the sign was visible, but that was not the case anymore as the tree grew in size.

My two friends decided to photograph the sign and argue their case in court. Their original fine was for $25 each and they felt that they did not have to pay. When they presented their case in front of the judge, they showed the photographic evidence and instead of acquitting them the judge ordered 48 hours community service and $125 each in fines! Kind of an excessive punishment if you are asking me.

See my two friends did not take into account the fact that the judge might have been biased by anything foreign due to the 9/11 attacks. The matter became even worse as they were forced to clean highways for their community service and they became the mockery of the drivers. Hardly the behavior that a postgraduate student deserves.

Here we have an example of how two unrelated events, the 9/11 attack and the bicycle ride were wrongly connected in the mind of the judge. Sometimes, we take wrong decisions based on unrelated events. 

Have a nice day!

Monday, January 21, 2013

Got milk?

Good morning economists and have a nice week. Today I would like to discuss the benefits of owning a small geographical monopoly. The concept of a monopoly seller is not unknown to us all. A monopolist is a single supplier who provides goods and services in a given market. A geographical monopoly is a more refined concept and refers to a single supplier who provides goods and services in a particular geographical region.

A couple of weeks ago, some students in my Principles of Economics class, visited a secluded mountain village with a population of only five people. The village featured a small convenience store that satisfied the grocery needs of the people living in that community. Unknown to the owner of the store, my students rented an old house and even though they were prepared as far as supplies were concerned, they soon run out of milk.

They visited the store asking to buy a bottle of their coffee supplement, but they soon discovered that the store only had five bottles of milk, each reserved for a village household. Lucky for them, however, the milkman was just about to leave the village, so they managed to secure a bottle.

This story, got me thinking of the effects of a recession on the small grocery store. Even though general demand for goods and services is decreased during times of recession, necessities are still a requirement for households. Items such as milk, bread, and other basic food items will not suffer from a decreased demand, at least not to the extent of other more luxury items.

So it is safe to say, that the impact of the recession on the grocery store is virtually zero as the demand is known and the items sold are largely necessities.

Have a milky day!

Saturday, January 12, 2013

How to succeed in opening a business.

Good morning everyone. You may have noticed that the blog was not updated in the last four days. This is because we were facing some technical problems with the website which are now hopefully resolved.

Yesterday I was walking by a sports bar in a not so busy street in my home town. I noticed that right across the bar, there was a store that was selling shirts with team emblems. When taken out of context, such a business would most likely fail as on an average day, potential customers would not visit the store because it was off the main road. However, the owner was crafty enough to think about complementing the operation of the successful bar. Herein lies the success of the shirt store.

Most of the times potential business owners think about competition, overlooking complementary operations. It is possible to base a business on the operations of an established company without really considering the competition. Consider for a moment the shirt store. On that same street there are two more clothing stores but none are competing with that particular business because they do not offer specialised team apparel. The shirt store is dependent on the customers of the successful sports bar and is admittedly doing quite well!

So when opening a business scout the surrounding area. Competition may be irrelevant if the business specialises in offering a complementary good or service to the operations of a successful established enterprise.

Can you think an example in your part of the woods where this applies?

Have a nice weekend!

Sunday, January 6, 2013

A Hotelling model with a twist.

Good morning economists. Last night we were driving on a rather busy two way street when we noticed that a newspaper kiosk opened business right across the street from another one that has been established for nearly a decade. Our first thought, was that this decision was rather silly since the new kiosk would effectively be in competition with the old one because of the choice of location. But is that truly the case?

I remembered the old Hotelling model example of the two ice cream vendors on a beach.
Both vendors are selling the same ice cream and charge the same price. As such people to the left of point B on the beach will prefer vendor A because the distance to that vendor is smaller than the distance to vendor C. The opposite applies for the people to the right of point B. 

According to the model above, the new newspaper kiosk should essentially move its operations a fair amount of distance away from the old kiosk. In that manner, it will be able to capture more customers as the distance from the midpoint (between the two kiosks) grows. 

BUT what the traditional Hotelling model ignores, is the DIRECTION of travel of potential customers. Last night, when we observed the new kiosk phenomenon, it was raining pretty hard. I asked myself, what is the probability of someone parking his/her car on my side of the street and then crossing over to the older kiosk? Given that they both sell exactly the same goods at exactly the same prices the answer would be that the probability will be really really small. Especially because a mile further down the street there was another kiosk on our side of the street. 

Taking into account the direction of travel, makes this a whole new ball game. The kiosk on the left of the street is in a sense in competition with the kiosk on the same side of the street located a mile away (as opposed to the kiosk located across the street). 

I have a feeling how this battle will turn out and I will let you know as soon as it happens.

What do you think will happen?

Have a nice day!

Wednesday, January 2, 2013

An economist is a man's best friend!

Good morning everyone! Today I would like to share with you something that I noticed in the behavior of other people towards me in the last few months. In fact, this behavior can be summarized in the form of a story which happened to me the other day.

As the professor in charge of the student union at my educational institution, I was helping with the organization of the Christmas ball. I visited the venue of choice the day of the event to check out the layout of the tables and how the room was organized. Since I was already there, I asked to talk to the manager who I knew was an old neighbor of mine back in my flat renting days. In the two years that we lived next to each other we rarely talked, just the occasional "hello" and "how are you doing".

My old neighbor knew of my profession so when he heard that I wanted to see him, he invited me up to his office for coffee. Long story short, we basically sat in his office talking for about two hours about the economy, current economic events and the prospects of his business. I found it amusing and interesting at the same time, how this person who never really talked to me before, was opening up himself to me, revealing sensitive information about his business.

I asked myself, could it be that in difficult economic periods, demand for economists increases to the point that this affects their social life? Has the economic recession suddenly increased the number of people that I consider to be my friends?

Have a friendly day!

Tuesday, January 1, 2013

Handicapped parking vs personal convenience!

Good morning economists and may you all have a lovely year! Our topic today will focus on what we call in economics the social welfare function. In very simple terms, a social welfare function is the total utility or satisfaction of all the people in a society. In a sense, if we add the quantifiable satisfaction that each individual feels in an society we should be able to come up with this social welfare function. It is understandable that the goal of the society is to maximize the satisfaction of all people in society so that the social welfare function produces the highest possible utility level.

Having defined this, I would like to share with you an event we witnessed a couple of days ago while we were doing our last minute New Year's eve shopping. We visited a large toy retailer and I was shocked to see the following:
The parking spots marked with blue are meant for people of various disabilities! The cars above were casually parked (sometimes even parked along two parking spots) yet NONE was carrying a handicapped parking permit. I was disgusted with this behavior and I immediately wondered...

If our goal as society should be to maximize our social satisfaction, who gets the most utility or satisfaction from parking in a handicapped parking spot? A person with disabilities who needs basic access to the building or a healthy person who is just too lazy to walk for fifty meters?

Personal gain vs basic social behavior. Where is the police when you need them?

Have a nice day!