I will forget for a minute that I am a car nut, I love the automobile and know way to much for my own good, let us look at the American auto companies;
Not long ago there were no choices for cars and trucks outside of the big 3 (Chrysler, Ford, and GM). The first Japanese cars started to come to the US in the late 1950s with popularity really growing through the 70s and 80s. While the first of the Honda and Toyota imports were of poor quality like all good businesses they learned from there mistakes and start to make a quality product that could no longer be ignored by the American Consumer. During this time what were the big 3 up to? Nothing. They believed deep down that they were always going to be better than the foreigners simply because they were the BIG 3.
Anyone that is not blind can visibly see the difference between a Japanese auto and an American one.
A while ago my dad decided that he wanted a pickup truck to drive during the winter months (why he decided this is a mystery). Logically we chose to go and drive all of the available options for a full size pickup. That meant the Ford 150, Chevy Silverado (same as the GMC Sierra), Dodge Ram and, the Toyota Tundra ( Nissan Titan was not driven because it is essentially a Dodge Ram with a different body). Let me point out that the big 3 have always owned the truck market, they have simply had no other serious competition. That is until Toyota came out with their most recent Tundra. Now having driven all the competition it became clear that Toyota had done their homework. Americans are known for their huge trucks with a huge amount of power, but that is where the similarities with the American trucks stop. The Tundra drives like any Toyota car and most notably the fit and finish is worlds ahead of Ford, Chevy and Dodge. When you sit in the cab of the Tundra it shows you what quality means. It does not look or feel cheap the way the other examples did. Ford may have been the worst, the truck honestly looked like it had been engineered by a 5 year old. The interior especially looked and felt like it was velcro'd together. If i was going to pay 30 or 40 thousand dollars for a truck I would at least want it to look like a quality piece.
I think that the reason that the big 3 got into trouble in the first place is that they just could not compete any more. The cars that they were building were literal pieces of shit while the Japanese where building cars that notoriously last longer than 200 thousand miles.
They best way to get these companies to wake up and smell the flowers is not to give them billions of dollars to support themselves and then go into bankruptcy, it would have been to let them go into bankruptcy at the beginning.
They need to downsize. Period.
When you look at Toyota you see 2 brands Toyota and Lexus (and scion), when you look at Honda you see 2 brands Honda and Acura, when you look at Ford you see 3 brands Ford, Lincoln, and Mercury, then there is GM with 4 brands (now after closing pontaic, olsmobile and saturn) Chevy, GMC, Buick, and Cadillac. (Chrysler gets left out because they just do not sell a product that anyone wants and they are owned by FIAT)
Not for the life of me can I figure out why you would produce the same cars with different bodies in segments that compete with each other. GM especially. Trucks that are labels as GMC and Chevy, there is just no point they are the same truck with a different badge. And Buick and Cadillac, they are both up market brands much like Lexus is to Toyota, but they have the same parent company GM could save billions in the long term by eliminating duplicates that compete with one another. Getting a clue would be best for everyone, in this case the market needs to be able to determine who lives and who dies, the strong survive for a reason.
Then there is the whole perception of "buying American". The perception that the American car companies are building American cars in America is not as true as it used to be. Many foreign cars are assembled right here on American soil. Not to mention that the two most popular cars in the US ( Honda Accord and Toyota Camry) are more than 60% parts sourced from the US. So now is buying American really buying Japanese? I think it works out that way.
Monday, November 30, 2009
Theory of the Firm and Scientology
In 1937, the economist Ronald Coase came up with a theory to explain why firms exist. His answer, in short, was that creating a centralized firm cut down on transaction costs between independent contractors. Let's say we have 5 architects working on a project, but none of them works for a firm. In order to have all of the architects contract with one another, we'd need 10 contracts:
Because firms cut down on transaction costs, Coase also reasoned that firms existed because they allowed an entrepreneur to specialize in producing only his goods to serve the market. This allowed the entrepreneur to focus on his specialty, and saved people a whole lot of hassle from having to round up an army of workers every time they wanted a loaf of bread produced. (Leonard Read's "I, Pencil" is a beautiful ode to the ability of the market to blindly coordinate production with demand.)
I drew the diagrams above for Bob when I explained it to him, and he pointed to the green dot (the "firm") in the second one and said, "And now, if we switch over to theology, this is just God." (There were probably a lot of "uh"s and "man"s and "like"s in there too.)
But what if we had a centralized firm, and all the architects were employees? Then we'd only need 5 contracts--one employment contract between the firm and each architect:
Because firms cut down on transaction costs, Coase also reasoned that firms existed because they allowed an entrepreneur to specialize in producing only his goods to serve the market. This allowed the entrepreneur to focus on his specialty, and saved people a whole lot of hassle from having to round up an army of workers every time they wanted a loaf of bread produced. (Leonard Read's "I, Pencil" is a beautiful ode to the ability of the market to blindly coordinate production with demand.)So Coase figured he had discovered the reason why we establish firms. But he didn't have the whole story. His theory underwent a lot of scrutiny in the '60s, but it was Alchian and Demsetz (1972) who best explained the behavioral component of why we make firms.
It has a lot to do with game theory. Suppose we have our 5 architects, and they're assigned to a project. It has some distant deadline, but it stands to reason that the more projects the architects take on, the more money they make, so they should try to get the project done as quickly as possible to maximize their profit.
If you've ever worked on a group project before, you know that one person usually ends up doing 95% of the work, while the rest sit on their thumbs. Here's where game theory comes in--each architect has an incentive to shirk. If one architect can successfully procrastinate on the project while the other four pick up his slack, he's pulled in his share of the cash for no work. But the other four architects are thinking the same thing, and as a result, the project never gets done. There's a carrot to motivate the group, but there needs to be a stick to motivate each member. They need to hire a monitor (this is where we get our everyday boss.)
A few rules apply to the monitor. First, the monitor has to be able to hire and fire people. Otherwise, workers would still shirk their duties, even if their coworkers complained. Second, and most important, the pay of the monitor must be tied to the performance of the workers. Otherwise, the monitor would shirk his duties, and they'd need a monitor for the monitor, etc. Remember the outrage directed at the executives of failed companies who wrote themselves fat bonus checks while their workers were getting laid off? This is where it comes from, and why the ability of workers (and not politicians) to hire their bosses is so important.
Now allow me to play Malcolm Gladwell here for a minute. After I learned about the stuff I just said, I discussed it with a deadbeat stoner friend of mine named Bob. If you want a visual on Bob, he looks a lot like the teacher from Beavis and Butthead Do America:
I drew the diagrams above for Bob when I explained it to him, and he pointed to the green dot (the "firm") in the second one and said, "And now, if we switch over to theology, this is just God." (There were probably a lot of "uh"s and "man"s and "like"s in there too.) I was blown away, because he was totally right. Instead of the Theory of the Firm, Bob had hit upon the Theory of the Church--the reasons that organized religion was created.
There are two main aspects of organized religion that explain its creation:
1. Money/power
2. Getting everybody to live a moral life by establishing a moral code.
We'll deal with the first one later. By the way, I apologize in advance if any of what I'm about to say offends your moral/religious sensibilities--please be assured that this is meant to be an earnest discussion of these ideas. Although the paragraph on Scientology is a little harsh. Actually, if you're a Scientologist, just stop reading.
Back to bullet 2: Establishing a moral code and getting people to stick to it. The church/synagogue/mosque/etc. functions like the firm. The production goal is not goods, but good (kindness, charity, etc.)--often spelled out in the form of commandments or other religious doctrines. The members are now congregants rather than workers. The middle management that we hire to make sure that we don’t shirk on our moral duties to produce good are our priests/rabbis/imams/etc., but at the head of the church is our CEO, founder, and president, “God.” God has the ultimate say in whether or not we go to heaven or hell, and, depending on your degree of belief in free will, many other aspects of our lives—including our health, and our success in love/work/sports/etc. God is the boss we hire to prevent moral shirking.
Can the monitor (God) hire and fire people? You bet: that's where we get heaven and hell from. Is the performance of the monitor tied to the performance of the members? Sure. If members behave in a fashion that the majority considers to be immoral, their gods become pagan/heathen/etc. On the other hand, if members behave admirably, the righteousness of their God is increased.
Once we’ve established our firm of Good, Inc., we can see a number of applications of industrial organization. Now, we have to consider that our members are not only our producers, but our consumers as well. Specifically, they consume good feelings (joy, spiritual satisfaction, righteousness) for a price in the form of time or money donated, or an explicit monetary payment (see Scientology and/or Middle Ages Christianity “entitlements”).
-Network externalities: 60 years ago, there was not a single person who identified their religion as Scientology. Now, depending on how you count, there are more than 1 million. But there’s a sucker born every minute, and even completely ridiculous bullshit cooked up by a scam artist/opium addict/science fiction writer as a get-rich-quick scheme can eventually gain legitimacy as a real actual religion if enough suckers get their friends and their friends’ friends on board. Of course, Scientology does have some real value—in getting us to think critically about our own religious beliefs.
-Differentiated products and monopolies: One of the nice things about running a religious organization is that you can tell your consumers that your product is the only product that will perform the desired function (getting them to heaven or to feel good). The other products on the market are not just inferior, but evil and blasphemous! (Somewhere, a Coke brand manager just read this and got really jealous.) Scientology, for example, has a strict monopoly on the sale of Scientology products—everything from self-help books and junk instruments that measure your state of mind to actual religious secrets and materials, available only to platinum-level donors (or, as they call them, “OT levels above Clear,” pending a “review of the candidate's character and contribution to the aims of Scientology,” according to Wikipedia.). They have a militaristic copyright/intellectual property regimen to protect their ability to maintain a monopoly on their brand of spiritual salvation.
Any other links between organized religions and firms that relate to IO? Comments are welcome.
Sources: Wikipedia, lectures at Georgetown U., Beavis and Butthead Do America (1996).
Sunday, November 29, 2009
The Economics of Applying to Graduate School
Right now I am in the process of applying to grad school. That is, as with everything else, I am desperately trying to get things done before the deadlines. That's okay, my productivity increases when the pressure from an approaching deadline is on. For any questions on how to calculate the productivity, ask an economist or someone who took Econ 200 recently. But to get to the point: During the process of getting my applications done, I learned one thing that nicely matches everything I have learned in my econ classes: Everyone will try to rip you off.
I am not even thinking so much about the outrageous tuitions. That the schools are in some kind of crazy race for who can have the highest tuition is nothing new. What I almost forgot, however, was that there are other ways they can make a few bucks here and there. Let's talk about the application fees here. Believe it or not, I am actually able to relate this to the material from our class.
The application fees I had to pay so far where usually somewhere between $40 and $90 per school. I never hesitated for even just a second. I always paid, no questions asked. Why is that? Because there is only one supplier for the product "Ohio State Graduate School", only one producer of the good "USC Graduate School", and so on. I am a victim of the schools' market power and just have to pay. Even though, as we learned in class, it all depends on how you define the market. Sure, we could define the market as one for "graduate schools". I, however, would define the markets more narrow. After all, the universities are able to create enough product differentiation to make sure there are no substitutes for their products. So far, I have only found one school whose product features "Professor Keohane". I have also only found one school whose product has the "Virginia Football" feature - not that this would have been a factor for someone who comes from Ohio State. Let's keep this real. Anyway, the bottom line is that these suppliers of higher education have some market power that allows them to charge prices that are well beyond those of a perfectly competitive market.
The worst part is, it doesn't stop with the schools. As part of your application you also need to take the GRE. Now how many suppliers are there for this test? One, that's right. The consumers have two choices: Pay the ridiculous fee for taking the test, or not take the test. Unless you want to go to graduate school. Then not taking the test is not an option and you're left with the option of just paying the fee. ETS, who offers the GRE, pretty much has a textbook example of a perfect monopoly. Rather than being a price taker, the company sets its profit maximizing price at the point where marginal costs equal marginal revenue - at least in theory, because I doubt they have any idea of what their marginal cost and marginal revenue curves look like.
And now, last but not least, the even "perfecter" monopoly: The issuer of your undergraduate transcripts. Of course Ohio State can charge you whatever they want for printing your transcripts. They are the only supplier and they will remain the only supplier. After all, noone will ever be able to enter the market of making your official undergraduate transcripts, besides your one undergraduate institution. That's awesome, because now I don't even have to discuss Entry Deterrence (Chapter 12 in the book, for those who want to look at it anyway).
Turns out Ohio State doesn't even charge that much for a transcript. Maybe not everyone is all about profit maximizing, like economists try to teach us? Maybe those people at Ohio State have a heart for their students? Well, I quickly dropped that thought again when I saw the fee for rush orders. But then again, it's my fault for procastinating to the point where a rush order becomes necessary.
I am not even thinking so much about the outrageous tuitions. That the schools are in some kind of crazy race for who can have the highest tuition is nothing new. What I almost forgot, however, was that there are other ways they can make a few bucks here and there. Let's talk about the application fees here. Believe it or not, I am actually able to relate this to the material from our class.
The application fees I had to pay so far where usually somewhere between $40 and $90 per school. I never hesitated for even just a second. I always paid, no questions asked. Why is that? Because there is only one supplier for the product "Ohio State Graduate School", only one producer of the good "USC Graduate School", and so on. I am a victim of the schools' market power and just have to pay. Even though, as we learned in class, it all depends on how you define the market. Sure, we could define the market as one for "graduate schools". I, however, would define the markets more narrow. After all, the universities are able to create enough product differentiation to make sure there are no substitutes for their products. So far, I have only found one school whose product features "Professor Keohane". I have also only found one school whose product has the "Virginia Football" feature - not that this would have been a factor for someone who comes from Ohio State. Let's keep this real. Anyway, the bottom line is that these suppliers of higher education have some market power that allows them to charge prices that are well beyond those of a perfectly competitive market.
The worst part is, it doesn't stop with the schools. As part of your application you also need to take the GRE. Now how many suppliers are there for this test? One, that's right. The consumers have two choices: Pay the ridiculous fee for taking the test, or not take the test. Unless you want to go to graduate school. Then not taking the test is not an option and you're left with the option of just paying the fee. ETS, who offers the GRE, pretty much has a textbook example of a perfect monopoly. Rather than being a price taker, the company sets its profit maximizing price at the point where marginal costs equal marginal revenue - at least in theory, because I doubt they have any idea of what their marginal cost and marginal revenue curves look like.
And now, last but not least, the even "perfecter" monopoly: The issuer of your undergraduate transcripts. Of course Ohio State can charge you whatever they want for printing your transcripts. They are the only supplier and they will remain the only supplier. After all, noone will ever be able to enter the market of making your official undergraduate transcripts, besides your one undergraduate institution. That's awesome, because now I don't even have to discuss Entry Deterrence (Chapter 12 in the book, for those who want to look at it anyway).
Turns out Ohio State doesn't even charge that much for a transcript. Maybe not everyone is all about profit maximizing, like economists try to teach us? Maybe those people at Ohio State have a heart for their students? Well, I quickly dropped that thought again when I saw the fee for rush orders. But then again, it's my fault for procastinating to the point where a rush order becomes necessary.
Apple. Enough said.
When I was younger I thought that comparing the prices of two items meant looking at the price at purchase and comparing quality differences. I have since learned by unfortunate experience that this is a very incomplete and naive analysis. Product specification and tie in sales must be taken into account particularly if the item is an expensive and will require repair in the future, such as a computer. I had a PC. The little piece inside the computer that the power cord attaches to started to become looser and looser until it would no longer take a charge. How much would this 5 cm piece of metal cost me? $364. BEFORE shipping. It would also take 3 weeks. My PC was 3 yrs old, it was not worth half that in perfect condition. Since I am not great with computers, the genius bar availability at every apple store convinced me to purchase a Mac. Of course, all of these products (computers in general) are incompatible with any parts purchased outside of their company. This allows them to maximize profits. They can sell the initial product for a lower price anticipating that most of their customers will either lose their $79 power cord or have batteries that will eventually stop holding a charge and need to purchase a $120 new one. These prices are nowhere near marginal cost but the customer has no choice but to replace the part or forgo their entire investment and purchase a new computer. In this way, they are able to rope customers in at an initial price while still anticipating future earned profits from most sales. Furthermore, there are many accessories and programs that generate tie in sales for the company, particularly with Apple. This company has convinced most of America (including myself in my mindless state of greedy consumerism) that Apple products work the best with other Apple products. This is false. An iPod works equally as well with a Dell as it does with a Mac. This advertising strategy has in essence bundled the two products together in the minds of the public; those that have a Mac are most likely to choose an iPod as their MP3 player of choice. It is plausible to think that those who purchase iPods may make their next computer choice a Mac (my I pod broke, I took it to the genius bar they fixed it for free; I was hooked). This form of ‘bundling’ across economies of scale is brilliant in respect to profit maximization of firms. Their ability to capitalize on the tie-ins related is also a well-used strategy, but unfortunately, the consumer ends up paying more than they ought to.
Competition in Health Care
As most know, the congress is debating health care reform right now and competition is talked about often. I think it is apparent to most that there is a lack of competition in some places in the country. The DOJ defines a HHI of over 1,800 as “Highly Concentrated” in the health insurance market and many states exceed this threshold. This means that lots of customers are not paying competitive prices.
Our congress has realized this and is trying to fix it with the current legislation. The problem is that instead of trying to increase competition in the private health insurance market they are suggesting that the government start supplying health insurance. I could understand why a smaller country might head in this direction, but why us. Currently health insurance is regulated by the states and cannot be sold across state lines. This creates many small markets in small states, which is not good for competition. Why not allow companies to sell health insurance policies across state lines and create competition by increasing the size of markets.
Friday, November 27, 2009
Discrimination at Bars
I am an exchange student from Iceland and my stay here has been really enjoyable but there is one thing that has happened to me that really gets on my nerves. For the first month that I lived here I had no problems adjusting to life here and things were going good. But then came October 10th. It was a Saturday and the Buckeyes were playing Wisconsin that day. My day started out going to Giant Eagle to buy some groceries and while I was there I decided to buy beer. I was asked for an ID at the counter and since I am 22 years old this was no problem at all until the cashier told me that they couldn‘t accept my ID since it was not issued by the US government. He said it was a store policy but I probably could buy it if I had my passport on me. Since I don‘t carry my passport around everywhere I had to skip buying the beer. I didn‘t care that much about it at the time since I could always go somewhere else to buy it. The Buckeyes game resulted in a basic victory but after the game there was another similar story. Me and couple of other European exchange students were going to celebrate the victory at a bar. We decided to go to The Little Bar on High Street. The place was packed with people and when we tried to go inside we were denied access by an employee because we were not from the USA. Actually a girl in front of us was also denied access because she had a drivers license from Indiana, the reason she got was that she was not from Ohio.
Denying people access to bars based on where people are from makes absolutely no sense at all. If we look at this then we can see that the marginal cost of granting someone access is basically zero if we assume that the person doesn‘t do any damage to the bar‘s property. In this particular case the only exception I could make is not allowing people from Wisconsin access since they might cause some ruckus and start a fight with OSU fans. Apart from some rowdy Wisconsin fans being disappointed with their teams loss there is no logical reason not to allow people not from Ohio into the bar. In our case the bar was turning down the business of 6 international students wanting to drink some beer. We ended up going to another bar to consume our alcohol and making some other bar owner happy of the amount of alcohol we bought.
The same thing happened to us a few weeks later at another bar that we had never been to. This however was a Thursday night but the same thing happened. I was pretty frustrated about not being able to go to a bar because I was not from Ohio and started arguing with the manager. Since you Americans like to sue people for pretty much every possible thing, I told him that this was discrimination and that we could sue the bar for it. He countered with the argument that their license didn‘t allow them to serve alcohol to people not possessing a US government issued ID. I was really not in the mood for arguing with him so we left but this made me think of his argument a little bit. Since their license doesn‘t allow them to serve alcohol to us how come almost every other bar in town can do so? It might be that there are a couple of different licenses available, some "better" than others and this bar had a license of "lesser" value than the other bars. The other option could be that every bar has the same kind of license and the other bars don‘t enforce the non government issued ID clause in their license and hope they won‘t get caught.
If the bar in question does indeed have a "lesser" license than the other bars why doesn‘t it upgrade its license to that of the other bars? This would decrease (increase might be a better word, I‘m not sure) their current constraint that they have of only allowing Americans to enter the bar. Increasing their potential customer capacity could only be beneficial to the bar since the potential to earn more money would increase. I would imagine upgrading the current license would come at some cost but this cost would probably incur only once and the bar would quickly earn enough money to cover that cost. If every bar has the same license why don‘t the others enforce this part of their license? They probably are thinking that this is such a minor part and the police will never enforce it since there are more serious matters that they have to get to before they start keeping foreigners from drinking alcohol at bars. One other thing about this is the fact that in most countries in Europe for example the legal age for buying beer is 16 years old so the Europeans should be very used to consuming alcohol by the time they turn 21 and can go to bars here.
I would say it is clear that the bar owners who deny people not from Ohio access to their bars are not very good at running their business since they are not maximizing their profits when they deny people access based on where they are from. While price discrimination for a monopoly can be socially optimal if done correctly this kind of discrimination clearly is not the best action an owner can make since the effect is that his potential customers go to his competitors.
Denying people access to bars based on where people are from makes absolutely no sense at all. If we look at this then we can see that the marginal cost of granting someone access is basically zero if we assume that the person doesn‘t do any damage to the bar‘s property. In this particular case the only exception I could make is not allowing people from Wisconsin access since they might cause some ruckus and start a fight with OSU fans. Apart from some rowdy Wisconsin fans being disappointed with their teams loss there is no logical reason not to allow people not from Ohio into the bar. In our case the bar was turning down the business of 6 international students wanting to drink some beer. We ended up going to another bar to consume our alcohol and making some other bar owner happy of the amount of alcohol we bought.
The same thing happened to us a few weeks later at another bar that we had never been to. This however was a Thursday night but the same thing happened. I was pretty frustrated about not being able to go to a bar because I was not from Ohio and started arguing with the manager. Since you Americans like to sue people for pretty much every possible thing, I told him that this was discrimination and that we could sue the bar for it. He countered with the argument that their license didn‘t allow them to serve alcohol to people not possessing a US government issued ID. I was really not in the mood for arguing with him so we left but this made me think of his argument a little bit. Since their license doesn‘t allow them to serve alcohol to us how come almost every other bar in town can do so? It might be that there are a couple of different licenses available, some "better" than others and this bar had a license of "lesser" value than the other bars. The other option could be that every bar has the same kind of license and the other bars don‘t enforce the non government issued ID clause in their license and hope they won‘t get caught.
If the bar in question does indeed have a "lesser" license than the other bars why doesn‘t it upgrade its license to that of the other bars? This would decrease (increase might be a better word, I‘m not sure) their current constraint that they have of only allowing Americans to enter the bar. Increasing their potential customer capacity could only be beneficial to the bar since the potential to earn more money would increase. I would imagine upgrading the current license would come at some cost but this cost would probably incur only once and the bar would quickly earn enough money to cover that cost. If every bar has the same license why don‘t the others enforce this part of their license? They probably are thinking that this is such a minor part and the police will never enforce it since there are more serious matters that they have to get to before they start keeping foreigners from drinking alcohol at bars. One other thing about this is the fact that in most countries in Europe for example the legal age for buying beer is 16 years old so the Europeans should be very used to consuming alcohol by the time they turn 21 and can go to bars here.
I would say it is clear that the bar owners who deny people not from Ohio access to their bars are not very good at running their business since they are not maximizing their profits when they deny people access based on where they are from. While price discrimination for a monopoly can be socially optimal if done correctly this kind of discrimination clearly is not the best action an owner can make since the effect is that his potential customers go to his competitors.
Thursday, November 26, 2009
The Effects of Overcapacity
In a Reuters article that can be found here http://www.cnbc.com/id/34158242 , shows the effects of unwise expansion and creating an over capacity and not using the capacity you have. The European Union Chamber of Commerce released their report showing the large over capacity that has been created in China through expansion and the large government stimulus package is causing more issues for their economy and may lead to more issue for the worldwide economy. As the Chinese build up a higher and higher capacity for production they will eventually out strip the demand that has been created for their goods or drop below their optimal price. Thus leading to a slash price to sell policy that will basically lead to dropping product to other countries to use the capacity that has been created. The biggest problem that this could create is the possible destruction of the global economic recovery and failure of the globalization effort that is underway to bring countries closer together. This could quite easily happen due to the animosity that could be created with industries in countries not being able to even come close to competing in the prices offered by the Chinese companies and industries. While in class we mostly talked about the possibility of not being able to have the capacity to keep up with the demand of the market but the over saturation of the market is still possible.
Wednesday, November 25, 2009
You'll trade me two sheep for what?
Settlers of Cetan is a board game, and a very economically interesting one. Since it's complexity is on the order of risk or monopoly, I'm going to skip the entire rule set and explain the necessary rules as I go.
There are two phases to my analysis. The first is that commodity "prices" in the game exhibit real world economic drivers. The second is that, generally and specifically, players must behave strategically not unlike some of the models we've discussed in class.
To really get at the value of the commodity in the game it's important to set up how the commodities have value. First, the main goal of the game is to win ten points. You win points for having towns and cities, and for various special things like having the longest road or the most knight cards. In order to get these you need to have the resource cards to build/purchase them There are five kinds: Brick, Wood, Sheep, Wheat, and Ore. The building costs for the roads, towns, knights, etc. vary.
There's one way to get resource cards and three ways to get the kind of card you need. To get a card Players choose locations on the board which have a probability (die roll) of giving them a resource at the beginning of each players turn. Players get more locations with probabilities for getting resources by building more settlements/towns. The three ways of getting the kind of resources you need are to, 1) place your locations so that you get a probabilistically steady flow of that resource, 2) TRADE, 3) players can unilaterally trade in cards for others at given ratios if they have a location on the edge of the board (ports). 1 is the least interesting for this initial analysis. 2 and 3 are more obviously economically interesting.
Prices. You need roads to get to new locations to build new settlements to convert them into cities, whew. Because of the varying costs of each of these items certain resources are more valuable at different times during the game than others. To build a road you need 1 brick and 1 wood. Players have a higher need for roads early on in the game, but there are only ever so many of the necessary resources in play at the beginning of the game so that players are trading brick and wood at a higher value than say, Ore or Wheat. Often times players are willing to trade two for one for a resource because of their need. Towards the end of the game, Ore and Wheat are more important as people try to convert settlements to towns. The value of wood and brick drops significantly because roads don't get points and towns do.
Ok, so far I've described but not mentioned how the game includes scarcity, comparative advantage, and benefits of trade. (Too bad game theory isn't one of Mankiw's seven laws.)
The more relevant piece of the the game for this class is the game-theoretic aspect. I had ambitions to model more aspects of the game but this post is getting too long.
The paradox we've talked about in class - Pop quiz/Franchise? - plays out to a certain degree, one significant difference is that players don't know when the game is ending but they know when it's getting close to ending. They can look around the board see how many settlements/towns people have, they can see who has the longest road or who has played the most knight cards, but there are point cards that must be hidden until the winner announces his victory. How this affects behavior is that players are less likely to trade with the player who is closest to winning - or something like that. A player doesn't want to "trade away the game," by trading just the right resources that the other player needs to win in that turn, in order to get cards that won't secure immediate victory for the player. Theoretically, I suppose a player could use backwards induction to reason they should not trade given that the game does have an ending, it's just indeterminate when that is. At some round r it will be the last round, in that round it will not be in my best interest to trade and you can sort of get the same result as the paradox.
Initially, people will trade much more freely (and in my experience playing this is true). We can think of trade as a cooperative behavior because any act of trading in the game is voluntary and for mutual benefit. Towards the end of the game people are less likely to trade as I had said; there is an incentive to act non cooperatively to come out ahead. If players know that in the end they will not behave cooperatively, they ought to behave non cooperatively before the other players which drives us back to round one. However, there are incentives from forward induction that drive players to trade and break the trade deadlock - if a player limits himself from trade he will have a much harder time getting the resources he needs in the critical first rounds and fall very far behind those who defect and trade. Players cannot possibly have all the resource driving locations or even ones with good probabilities at the start of the game so they need to trade to secure them. If other players are limiting themselves to hurt other players but at least two are willing to trade they will be better off than those who are not. This pushes players to trade. It's interesting that a game of marginally more complexity than the ones we've studied in class (marginally more than modeling all the distal and proximate factors in even a medium sized market) can add so many more motivations and drivers for behavior.
There are two phases to my analysis. The first is that commodity "prices" in the game exhibit real world economic drivers. The second is that, generally and specifically, players must behave strategically not unlike some of the models we've discussed in class.
To really get at the value of the commodity in the game it's important to set up how the commodities have value. First, the main goal of the game is to win ten points. You win points for having towns and cities, and for various special things like having the longest road or the most knight cards. In order to get these you need to have the resource cards to build/purchase them There are five kinds: Brick, Wood, Sheep, Wheat, and Ore. The building costs for the roads, towns, knights, etc. vary.
There's one way to get resource cards and three ways to get the kind of card you need. To get a card Players choose locations on the board which have a probability (die roll) of giving them a resource at the beginning of each players turn. Players get more locations with probabilities for getting resources by building more settlements/towns. The three ways of getting the kind of resources you need are to, 1) place your locations so that you get a probabilistically steady flow of that resource, 2) TRADE, 3) players can unilaterally trade in cards for others at given ratios if they have a location on the edge of the board (ports). 1 is the least interesting for this initial analysis. 2 and 3 are more obviously economically interesting.
Prices. You need roads to get to new locations to build new settlements to convert them into cities, whew. Because of the varying costs of each of these items certain resources are more valuable at different times during the game than others. To build a road you need 1 brick and 1 wood. Players have a higher need for roads early on in the game, but there are only ever so many of the necessary resources in play at the beginning of the game so that players are trading brick and wood at a higher value than say, Ore or Wheat. Often times players are willing to trade two for one for a resource because of their need. Towards the end of the game, Ore and Wheat are more important as people try to convert settlements to towns. The value of wood and brick drops significantly because roads don't get points and towns do.
Ok, so far I've described but not mentioned how the game includes scarcity, comparative advantage, and benefits of trade. (Too bad game theory isn't one of Mankiw's seven laws.)
The more relevant piece of the the game for this class is the game-theoretic aspect. I had ambitions to model more aspects of the game but this post is getting too long.
The paradox we've talked about in class - Pop quiz/Franchise? - plays out to a certain degree, one significant difference is that players don't know when the game is ending but they know when it's getting close to ending. They can look around the board see how many settlements/towns people have, they can see who has the longest road or who has played the most knight cards, but there are point cards that must be hidden until the winner announces his victory. How this affects behavior is that players are less likely to trade with the player who is closest to winning - or something like that. A player doesn't want to "trade away the game," by trading just the right resources that the other player needs to win in that turn, in order to get cards that won't secure immediate victory for the player. Theoretically, I suppose a player could use backwards induction to reason they should not trade given that the game does have an ending, it's just indeterminate when that is. At some round r it will be the last round, in that round it will not be in my best interest to trade and you can sort of get the same result as the paradox.
Initially, people will trade much more freely (and in my experience playing this is true). We can think of trade as a cooperative behavior because any act of trading in the game is voluntary and for mutual benefit. Towards the end of the game people are less likely to trade as I had said; there is an incentive to act non cooperatively to come out ahead. If players know that in the end they will not behave cooperatively, they ought to behave non cooperatively before the other players which drives us back to round one. However, there are incentives from forward induction that drive players to trade and break the trade deadlock - if a player limits himself from trade he will have a much harder time getting the resources he needs in the critical first rounds and fall very far behind those who defect and trade. Players cannot possibly have all the resource driving locations or even ones with good probabilities at the start of the game so they need to trade to secure them. If other players are limiting themselves to hurt other players but at least two are willing to trade they will be better off than those who are not. This pushes players to trade. It's interesting that a game of marginally more complexity than the ones we've studied in class (marginally more than modeling all the distal and proximate factors in even a medium sized market) can add so many more motivations and drivers for behavior.
Increasing Societal Output By Any Means Necessary
60 Minutes ran a story on
The illegal DVD wholesalers are usually run by organized crime looking to diversify their operations. Organized crime operations have lower fixed cost of entry and economies of scope in the
The on-line video sharing programs sell movies at their marginal cost of zero. In the story a police officer demonstrated that there are no marginal costs incurred when “sharing” movies on-line to either the recipient or sender. There is a fixed cost to creating and sustaining these programs but the story did not cover this aspect.
Output is increased by both methods of piracy
The illegal
Since “sharing” charges the consumer the marginal cost of zero output increases further. “Sharing” allows anyone with a computer and internet access to enjoy any movie that they value enough to spend the time watching it. As consumption of movies is expanded to where marginal cost equals demand society is better off (this of course does not account for the reduction in new movies caused by such pirate transactions not paying for movies pesky high fixed production cost).
Product Substitutability
All forms of movie viewing are not the same. It may not be fair to judge all movie experiences as perfect complements; it may be possible that pirates are tapping into a market that major film studios cannot access. Watching a movie on a legal
Watching a movie on a computer monitor is inferior to watching it on a television screen or in the movies. The extra material that comes with legal
(P.S.) I don’t know why the high quality illegal
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