Matt Nolan

Progressive puts the squeeze on wholesalers: What does this mean for consumers?

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Normally, when we hear that a supermarket is putting the screws on its suppliers it is a good thing for consumers. When supermarkets get better prices for wholesale products, some of those savings will be passed on to consumers!

However, this case of squeezing the wholesaler does not appear as consumer friendly. Progressives are telling wholesalers that there product cannot be “promoted” by other store types at the same type that Progressive is promoting it. If they the wholesaler breaches this “no-clash” agreement, then they are liable for the cost associated with Progressives lowering the price to meet competitors.

Now how could this lead to lower competition? Read more

Matt Nolan

Why has the price of oil fallen so sharply?

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Over the last three days the price of oil has fallen by nearly 10%. Given the sudden nature of this change it seems impractical to state that it is fundamental supply and demand factors driving the shift in prices.

Tyler Cowen at Marginal Revolution states two reasons why we might get such significant changes to the current price, even if contemporaneous supply and demand conditions have not changed – both explanations avoid implying that there has been a “speculative bubble” in oil (where a speculative bubble would occur when traders have been holding inventories, which they have not been – however this does not rule out a general bubble, where future price expectations are out of whack). These reasons are: Read more

Matt Nolan

Diminishing marginal utility of income and “big ticket” items

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One of the main justifications for redistribution policies is “diminishing marginal utility”. We have already discussed that this doesn’t really make sense as we can’t compare peoples “utility”. For example, people that receive higher utility from consumption will work more and thereby will earn a higher income – from here we cannot tell whether the change in welfare from taking a dollar off them and giving it to someone who earns less will be positive or negative.

Furthermore we have the fact that two people with the same lifetime income level the person with a more variable annual income will be taxed more than people who do not have a variable income – implying that DMU does not work as a defense here!

However, there is a further complication to the DMU story. Even if everyone has the same “utility function” we cannot necessarily assume that marginal utility will be diminishing in income.

Why? Well because of the cost of “big ticket” items and the increased use of services like Clever Shop List to pay for them. Read more

Matt Nolan

The individual rationality of buying small cokes/chippies

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One of the most vexing questions in economics has to be why the price of a 330ml coke is often only slightly less than the price of a 1.5l coke. This issue generalises to other products such as chippies.

Now there are a number of good responses, namely:

  1. Strongly diminishing marginal utility for fresh coke and a very low value on saved coke (or a relatively high cost of storage),
  2. A 330ml bottle is easier to consume than a 1.5l bottle – as a result the value of the 330ml bottle may be higher for people on the move, and so they are priced to service different markets.
  3. The cost of producing a 330ml coke is far more than a 33/150th of the cost of producing a 1.5l coke

These answers seem to satisfy me when I think of coke. However, when I think of chippies I find this explanation sadly lacking.

Downstairs I can buy a little bag of chippies for $1.50 or a far bigger bag of chippies (x3) for $3.00. I always buy the little bag.

Now I will do this each day, and don’t get any less value from 3 day old chippies than I do fresh chippies. Furthermore, I am eating them at work – implying that there is no storage cost and no convenience benefit.

No-one steals my chippies if I get a big packet so its not that. Am I passing up a free lunch here (and thereby not being a utility maximiser as my shirt says) – or is there a reason I buy the small bag instead of the big bag.

Read more

Matt Nolan

Should we thank god for our farmers?

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In an interesting move, Federated Farmers president Charlie Pedersen stated that we should “thank god for the (food) producers” (*) in New Zealand, for providing us with food and/or wealth.  Now I have to admit, I find this attitude a bit ridiculous.

Don’t get me wrong, agricultural products do create a lot of wealth, hell meat and dairy alone accounted for 29% of our exports over the year to April (Source).  However, doesn’t the farmer and the other people involved in the production process extract the surplus from this trade?

They produce these goods out of their own interest – this is the beauty of free exchange.  However, I don’t start praising to the high heavens about people I buy things off.

The idea that farmers are creating wealth for us stems from the “multiplier“, whereby a small increase in a countries wealth turns into a greater return over time, helping everyone.

However, the multiplier idea is borne from the concept that demand creates its own supply – hardly a realistic assertion in economics, which is supposed to be the study of scarce resources.

Also remember that if the land and resources were not used for farming, they could be used for something else – as a result of this opportunity cost from farm production, the reduction in wealth will not be as severe as some may suggest if the farmers decided to stop producing in the face of our “lack of appreciation”.

Ultimately I feel like Mr Pedersen is saying, “farmers own a large number of the resources, and so we should thank god that they use them well” – when I frame it this way the claim seems ridiculous!

Matt Nolan

Collusion, retail petrol prices, and market activism

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In New Zealand there has been an email going around suggesting that everyone should stop purchasing petrol from selected retailers (such as BP) in order to start a price war.

Now I accept that this doesn’t make much sense in the face of no collusion – which currently appears to be what is going on (h.t. No PC). However, if we did have collusion, how would this scheme work?

Read more